
    Jefferson County National Bank, Resp’t, v. John C. Streeter, App’lt.
    
    
      (Court of Appeals,
    
    
      Filed June 7, 1887.)
    
    1. Bankruptcy—Fraud in preference—United States Statutes, 1867 —Section 39, as amended 1874.
    The effect of section 39 of the bankrupt act of 1867 as amended 1874, prohibiting a creditor who had obtained a fraudulent preference from proving more than a moiety of his debt, was to mitigate the harshness of the original section 39, which prevented him from proving any portion of his debt, although he had to be deprived of the benefit of the preferential provision, and to confine the prohibition to cases of actual fraud, and even in cases of actual fraud limited the penalty to the right to prove a moiety only.
    
      2. Same.
    Where judgments were obtained by default against the makers of promissory notes, by an attorney who has notice of their insolvency, and the judgments were set aside by the United States courts, as a fraudulent preference, because of the knowledge of the attorney, it is not a case of actual fraud within the act of 1874, and would not preclude plaintiff from prov its debt against the estate of the bankrupts or against the indorser of the notes.
    Appeal from supreme court, general term, fourth department.
    In 1877 H. V. Caldwell & Co. made three promissory notes, had them indorsed for accomodation by defendant and negotiated them with plaintiff. The notes were not paid and were duly protested, and notice given defendant. Judgment was obtained against the makers of the notes April 6, 1877, execution issued and a levy made upon their property more than sufficient to satisfy the judgment. On the same day a petition in bankruptcy was filed against the said makers in the United States court, and on the ninth April plaintiffs and the sheriff were enjoined from selling the property levied upon, and the said makers were adjudged bankrupts on the first of May, and an assignee appointed, and the sheriff appointed special receiver of their estate and directed to sell the property levied upon, and deposit the money in the court of bankruptcy, the lien of the judgment creditors not to be affected, which he did. The assignee afterwards brought an action in the United States court to have plaintiffs judgment adjudged void as against such assignee, and the money be paid to him, in which he was successful March 30, 1880. The bank took an appeal to the United States circuit court, but the judgment was affirmed. This action was then brought on the same notes, against the indorser, and the defendant moved the court to dismiss the complaint on the grounds, among others, that the plaintiff, having obtained a fraudulent and preferential judgment, and levy under the bankrupt law, against the makers of the notes, who were primarily hable for their payment, it thereby precluded itself and the defendant, the indorser, from proving the notes or any part thereof in bankruptcy, against the makers’ estate, and so released the said defendant as indorser. The court denied the motion. Defendant excepted. The court, on a finding of facts, ordered judgment for plaintiff, from which this appeal is brought.
    
      D. O’Brien, for app’lt, John Lansing, for resp’t
    
      
       36 Hun, 40, mem.
      
    
   Andrews, J

There has been some conflict of judicial opinion in the courts of the United States as to the true construction of that part of the amendment to section 39 of the bankrupt act of 1867, made by the act of congress of June 22, 1874, which relates to the proof of debts by creditors who had obtained. a fraudulent preference on the property of the bankrupt. The original section 39, authorized the assignee of a bankrupt to maintain an action to recover back money or property paid, conveyed, sold, assigned, or transferred by the bankrupt contrary to the act, ‘ ‘ provided the person receiving such payment or conveyance had reasonable cause to believe that a fraud on the act was intended, or that the debtor was insolvent;” and the proviso is followed by the declaration that “ such creditor shall not be allowed to prove his debt in bankruptcy.” The amendment of 1874 substitutes for the last clause in section 39 the following: “And such person, if a creditor, shall not, in .case of actual fraud, be allowed to prove for more than a moiety of his debt.”

It was held by Judge Blatchford, while sitting as district judge in the case of In re Stein (16 N. B. R., 569), that the only effect of the amendment of 1874 was to create a limitation upon the right to prove debts on a voluntary surrender under section 23 of the act of 1867, and to forbid a creditor, in case of actual fraud on his part in obtaining the preference, to prove for morfe than one-half his debt, notwithstanding he may have surrendered what he had received. But this construction of the amendment of 1874 has not been generally adopted. On the contrary, it has been held in several cases, both in the district and circuit courts of the United States, that the intention and true construction of the amendment was to mitigate the harshness of the rule prescribed in.the original section 39, which prohibited a creditor who had obtained a preference in fraud of the act from proving his debt, although he had been deprived of the benefit of the preferential provision, and to confine the prohibition to cases of actual, as distinguished from constructive, fraud; and, even in cases of actual fraud, to limit the penalty of the fraud to a denial of the right to prove the debt as to a moiety only. In re Black, 17 N. B. R., 399 (Dist. Ct. Mass.); In re Newcomer, 18 N. B. R., 85 (Dist. Ct.); 19 N. B. R., 283 (Dist. Ct., N. J.); Burr v. Hopkins, 12 N. B. R., 211 (Cir. Ct., Wis.); In re Reed (Cir. Ct., Mass.); In re Cadwell (Dist. Ct., N. D., N. Y., 1883), affirmed in circuit court.

This construction is sustained by a large preponderance of judicial authority, and what is especially important to notice, it has the sanction of the district and circuit courts of New York, having the original and final appellate jurisdiction in cases of bankruptcy arising within this state. We think the construction is sensible, and, although there may be reason for doubt, we are disposed to follow the general current of authority upon the question, and to hold that, in cases coming within section 39 of the act of 1867, the effect of the amendment of 1874 was to remove the prior absolute prohibition against the proof of a debt by a creditor who had obtained a preference which had been annulled, and to confine the prohibition to cases of actual fraud, and to limit it even in those cases to a disability to prove more than one-half of the debt.

The original judgments in favor of the bank against Cadwell & Co. were recovered on notes made by Cadwell & Co., indorsed by the defendant Streeter. They were obtained in due course, on default, after personal service of process on the defendants in the action. Executions on the judgments were issued to' the. sheriff, and were levied on a stock of goods of Cadwell & Co. prior to the commencement of the bankruptcy proceedings against the firm. By an order of the district court, made after the filing of the petition in bankruptcy, upon the application of the petition ing creditors, the attorney for the bank consenting thereto, the sheriff was appointed special receiver of the estate of the bankrupts, and was directed to sell the property levied on, and deposit the proceeds of the sale with the usual depository, subject to the further order of the court; but the order provided that “ the hen of the judgment creditors, if any,” should “follow and attach to the moneys arising from the sale.”

It was adjudged in the action subsequently brought by the assignee in bankruptcy that the judgments of the bank were void as against such assignee, and that he was entitled to the fund, the proceeds of the goods sold by the sheriff under the order of the bankruptcy court. The judgment in the action by the assignee in bankruptcy does not, on its face, disclose the particular grounds upon which the adjudication therein proceeded. Without going into detail, it is sufficient to say that it is to be collected from the pleadings and the opinion of the court that the judgments and executions in the state courts were set aside as a fraudulent preference, not on the ground of any actual fraud on the part of the bank or its officers, but for the constructive fraud growing out of the fact that its attorney who procured the judgments had notice of the insolvency of Cadwell & Co. at the time of commencing the action in favor of the bank, and designed to obtain a preference by means of the proceedings in the state courts, which was imputable to the bank, and rendered |the judgments void. See opinion of Wallace, J. MS.; Brown v. Jefferson Co. Bank (19 Blatchf., 315). It was not, therefore, a case of actual fraud, within the act of 1874. It is not very easy to define what is meant by actual fraudin this statute.

Judge Lowell, in the case of In re Black (17 N. B. R., 399), referring to these words, said-: “The meaning of the statute appears to be plain that, after a recovery of the damages and costs, the creditor may prove his debt, if he have not actually assisted in the fraud.” It would seem to require something more than mere imputable fraud to debar a creditor who has acquired an unlawful preference from proving his claim after he ’has been deprived of his security. The words “actual fraud” were apparently employed in contradistinction to legal or constructive fraud, and are only satisfied, we think, where actual complicity or a conscious purpose on the part of the creditor to accomplish a known fraud upon the act is shown.

The evidence comes far short of this proof in this case, and the bank was not, therefore, debarred from proving its debt, provided the obtaining of the judgment, and the levy upon the property of the bankrupts under the executions, was a conveyance, sale, assignment, or transfer of the property of the bankrupt within section 39 of the act of-1867. We think these terms must be construed to embrace such a transaction as this; otherwise it would happen that a creditor who merely proceeded to judgment, execution and levy, that afterwards were set aside at the suit of the assignee in bankruptcy as constructively fraudulent, would be in a worse plight, as to proving his debt, than, a creditor who had actually taken and applied the property of the bankrupt upon his debt by way of preference. It cannot be supposed that this, discrimination could have been intended. The right of the bank to prove its debt was affirmed by the district and circuit courts in this state in respect to another debt held by the bank against the same bankrupt under precisely similar circumstances. It follows that the defendant was not prejudiced by the act of the. bank in its dealings with Cadwell & Co. It did not thereby preclude itself from proving its debt against the estate of Cadwell & Co. in bankruptcy, nor interfere with the right of the defendant as indorser. The consent of the bank to the order of the district court appointing the sheriff as special receiver, and directing a sale of the goods levied upon, is not a defense. The order preserved the lien of the execution, if any, and transferred it from the goods to the proceeds. It was subsequently decided by a court of competent jurisdiction that no lien was aquired as against the assignee in bankruptcy. The judgment of the bankrupt court was conclusive upon the bank, and the question is not open for contestation by the defendant.

We think the judgment below is right, and it should, therefore, be affirmed.

All concur.  