
    Julius B. North, as Trustee in Bankruptcy of Delbert A. Taylor, a Bankrupt, Respondent, v. Delbert A. Taylor and Others, Appellants.
    
      Fraudulent transfer by a bankrupt—preference of notes made by the bankrupt'—the indorsers are not liable where the notes are paid out of the individual funds of the transferee and not from the transferred pi'operty.
    
    Where a bankrupt fraudulently transfers his property under an arrangement by which the transferee agrees, as part of the consideration for the transfer, to turn over to the bankrupt a note given by the latter to the transferee’s wife, and in pursuance of such arrangement the transferee gives his own note to his wife in exchange for the note of the bankrupt and surrenders the latter note to the bankrupt, the transferee’s wife, who was in no way a party to the scheme to prefer the note, is not liable to the trustee of the bankrupt for the amount thereof.
    Where the transferee, as part of the consideration for the fraudulent transfer, undertook to pay two of the bankrupt’s notes , which had been indorsed by, third parties, and after the entry of an order in the bankruptcy proceeding enjoining the transferee from disposing of any of the property transferred to him paid the notes as they became due out of his individual funds, the indorsers are not liable, tinder section 60 of the National Bankruptcy Act (30 TJ. S. Stat. at Large, 568) to the trustee in bankruptcy for the amount of the notes — certainly where it does not appear that the indorsers “had reasonable cause to believe that it was intended thereby to give a preference.”
    Appeal by the defendants, Delbert A. Taylor and others, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Washington on the 17th day of August, 1900, upon the report of a referee.
    This action was brought by plaintiff as trustee in bankruptcy, to set aside the transfer of property from the bankrupt Taylor to the defendant Frank Fish as fraudulent and void, and to recover from him such property or the proceeds thereof; and also to recover as against the defendant Brown certain property alleged to have been fraudulently transferred to him by said bankrupt; and also to recover as against the defendants Elizabeth Fish, Howland Fish and Oora F. Taylor certain sums received by them, or paid for their benefit, in violation of the provisions of section 60 of the Bankrupt Law.
    The issues were referred to a referee to hear, try and determine, and this appeal is taken from the judgment rendered on his decision thereon.
    
      Fred A.. Brail, for the appellants Fisli.
    
      Potter dk Kellogg, for the appellants Taylor. .
    
      B. O. Bascom and Edgar T. BracTcett, for the respondent.
   Parker, P. J.:

The conclusion of the referee that the transfer from the bankrupt Taylor to Frank Fish of the stock of boots and shoes and book accounts was fraudulent and made with intent on the part of both to hinder, delay and defraud the creditors of Taylor, is one with which' we are not disposed to interfere. It is'a pure question of fact, and of that character which peculiarly requires a view of the witnesses, and that one be in touch with the atmosphere surrounding the trial to reach a satisfactory conclusion. We affirm, therefore, the judgment, so far as it avoids that transfer and directs that said Fish restore the property, or the proceeds thereof. We also affirm so much of the judgment as avoids as fraudulent the transfer from said Taylor to the defendant Brown and allows the plaintiff to recover from Brown the same, or the proceeds thereof. No appeal by Brown being now pending we have not that question before us.

So much of the judgment, however, as gives to the plaintiff the right to recover $570 against the defendant Elizabeth Fish, and so much as gives to him a right to recover $1,141.50 against the defendants Cora F. Taylor and Howland Fish is not, in our judgment, sustained by the facts which clearly appear from the evidence in this ease.

Elizabeth Fish, just prior to the fraudulent transfer to Frank Fish, who is her husband, held a note for $500 given to her by said bankrupt, Taylor, and upon which there was then due for principal and interest about $525. Coneededly it was a bona fide claim, and in the agreement between Fish and Taylor, Fish was to procure and turn over to Taylor this note as a part of the purchase price for the boot and shoe stock then transferred to him. In pursuance of such arrangement, a day or two before the transfer Frank Fish gave his own note for $500 to Elizabeth Fish, and took from her in exchange the note which she held against Taylor, and, upon the transfer, such note was surrendered to Taylor as part payment for the stock. There is no evidence, nor indeed is there any claim, that Elizabeth Fish, herself, then knew that Taylor was bankrupt or was prefering any of his creditors. She was in no way a party to the scheme. The idea that her husband acted as her agent to procure this preference is not sustained by the proof; she never made him such an agent or knew that he had any purpose of acting as such. So far as she appears in the transaction she sold her note against Taylor to her husband and took his note in exchange therefor. That note she still holds, and it is all she ever received upon or for the note given by Taylor. Frank Fish then became her debtor and not her agent. He, himself, was thenceforth the creditor of the bankrupt to the extent of that note. He then held it against Taylor, and he was the party preferred by the transfer to him of the boots and shoes in exchange therefor.

The claim, therefore, that this plaintiff may recover against her the amount of such note, as a creditor who has received a preference in violation of section 60 of the Bankrupt Act (30 ü". S. Stat. at Large, 562), is not sustained by the facts. No part pf the bankrupt’s assets have been diverted to pay her debt. She had ceased to be his creditor when this transfer was made. Undoubtedly the debt was preferred, and doubtless the scheme was concocted to prefer it, but the preference was to Frank Fish, the then owner of the note, and the judgment which requires him to restore to the bankrupt’s estate the property' turned over by the bankrupt to work such preference has fully covered the requirements of such section.

The defendants Cora F. Taylor and Howland Fish had indorsed two certain notes for $500 each, which at the time of such transfer were held by Otto M. Pratt, one of which was to become due on January fifteenth and the other on May twenty-third then next. Upon the two there was then owing for principal and interest about $1,040. In the agreement, which transferred such stock of boots and shoes from the bankrupt, Taylor, to Frank Fish, Fish undertook to pay, as part of the purchase price of the same, such two notes, to the amount' of $1,040. Undoubtedly such agreement was intended' to prefer the two notes over the' other creditors of Taylor, and it is, therefore, claimed that their subsequent payment by Fish, as they became due, inured to the benefit of such indorsers, and that, therefore, a judgment-may be recovered against them by this plaintiff under the provisions of said section 60, as persons benefited by such preference. " ■ "

Such transfer to Fish was made on November 26, 1898. On December twelfth a petition was filed by said Pratt against said Taylor, charging that such transfer was fraudulent and void, and praying that he be adjudged a bankrupt.- On December twenty-seventh an order was entered in such proceeding, enjoining said Fish from disposing of any of the property so transferred to him, except to retail the same for cash, in the ordinary course of business, and deposit the-receipts in bank to the order of the court. And subsequently, in June, Taylor was adjudged a bankrupt, and this plaintiff appointed the trustee of his property. '

Fish did pay to Pratt, at the maturity of each note, the'-amount due thereon. He testified that he used none of the stock so transferred to him, nor any of the proceeds therefrom, to make such-payments,, but -that he used his own funds, and that when-he paid the notes he took them up and holds them yet. This statement of Fish’s is not contradicted- in- any way. And the question arises what is the legal effect of such a transaction ?' The money with which Fish took up these notes was-his own-money. It never formed any part of Taylor’s assets-. True, Fish had promised to pay such amount in exchange for goods received from the bankrupt, but he had not done -so when the bankruptcy proceedings interfered and enjoined him from using the property so transferred to him.

Such interference by Taylor’s creditors, being a repudiation of such sale and transfer, Fish’s liability to pay such unpaid portion of the purchase price ceased. Só far as he had actually turned over property to Taylor, or paid him money on that fraudulent transfer, he must lose the same; equity gives him no relief for that. But neither Taylor, nor his creditors, could avoid such transfer and still insist upon Fish’s paying for the same, When they deprived Fish of the property for which he had agreed to pay this sum of $1,040, the right to claim that amount as purchase money due to Taylor ceased. Equity does not give to Taylor, or to his creditors,' both the property and the purchase money still owing thereon. The estate of the bankrupt has not, therefore, been in any way depleted by the- payment of the .two notes in question. If they are to be deemed paid; if Fish may not still hold them to his own use as •claims against the bankrupt’s estate, they have been paid by Fish’s property, and not by the bankrupt’s. So far as any trcmsfer. of the bankrupt’s property has been made to secure a preference to those notes, it was made to Fish alone; and under the judgment in this action will be by him restored to such estate.' No liability, therefore, arises under section 60 of said act against either the holder or the indorsees to restore the amount so paid. A preference has not been given to such notes in violation of that section.

Furthermore, there is no claim that either of such, indorsers had, at the time it was made, any knowledge of the fraudulent transfer by which Taylor intended to prefer such notes. Not until December fifteenth, when the commencement of the proceedings in bankruptcy gave them notice, did either have, any knowledge of any such purpose. And soon thereafter Fish was enjoined from using any of the proceeds of the property so transferred. What reason had the indorsers to believe, from, a knowledge of such facts, that Fish would pay such notes at their maturity % What reason had they to believe that Pratt, who had instituted such proceedings, would receive such payment even if offered ? The ‘ judgment against such indorsers can be sustained under the provisions of section -60, only in the event that they had reasonable cause to believe that it was intended thereby to give a preference ” to those notes. When the ba/nhrii/pt acted in the matter and transferred his property with the prohibited intent they had no knowledge whatever concerning the transaction; and from all that they learned thereafter the clear inference was that no preference would in fact ever-be given.

In this respect also it seems that these indorsers are not brought within the provisions of section 60:

We conclude, therefore, that such provisions of the judgment against the defendants Elizabeth Fish, Howland Fish and Cora F. Taylor are erroneous and should be reversed.

All concurred.

So much of the judgment as entitles the plaintiff to recover the sum of $570 against.the defendant Elizabeth Fish, -and so much thereof as entitles the plaintiff to recover $1,141.50 against the defendants Cora F. Taylor and Howland Fish reversed on the law and the facts,, with costs,, and such judgment in all other. respects is unanimously affirmed,, with costs.  