are

weight of authority, and such construction the surrender clause alone prohibited a surmay, therefore, be said to have been that render after recovery by the assignee. This generally accepted, and, in our judgment, class of cases is illustrated by Re Richter, was the correct one.

1 Dill. 544, 4 Nat. Bankr. Reg. 221, Fed. These cases, which thus held that the loss Cas. No. 11,803. In that case a creditor of the right to prove, after compulsory sur-who, in consequence of a recovery by the render, arose not from the surrender clause assignee, had surrendered a preference, independently considered, but solely from sought to prove his claim against the estate, the operation upon that clause of $ 39, and his right to do so was resisted. Analyz

exemplified by the case of Re Le-ing the act and stating the different conland, 7 Ben. 156, Fed. Cas. No. 8,230, opin- structions of which it was susceptible, the ion of Blatchford, J. In that case, aft-court expressly declared that the correct er holding (p. 162; that the prohibition of view was to construe $8 23, 35, and 39 to§ 39 applied as well to cases of voluntary as gether, and that the result of so doing to cases of involuntary bankruptcy, the would be to annex to both $$ 35 and 23 the court came to consider the surrender clause penalty provided in § 39. The surrender of g 23 as affected by the penalty provided clause was then noticed, it being said: for in § 39, and said:

"It is urged by the claimants that this “This provision is to be construed in con- refusal was erroneous, because they had, benection, and in harmony, with the provision fore the time when they made their motion, of the 23d section, before cited. If, under surrendered to the assignee all property rethe 23d section, the preferred creditor were ceived by them under the preference. This allowed to surrender to the assignee the devolves upon us the duty of interpreting property received in preference, even after the meaning of the word "surrender," as it it had been recovered back by the assignee, is here used. And it is our opinion that a as mentioned in the 39th section, so as to creditor who receives goods by way of be able to prove his debt, no creditor taking fraudulent preference, and who refuses the a preference would ever be debarred from demand therefor which the assignee is auproving his debt. If, under the 39th sec- thorized to make ($ 15), denies his liabiltion, it were held that the mere taking of ity, allows suit to be commenced by the asa preference by a creditor would debar him signee, defends it, goes to trial, is defeated, from proving his debt, without the precedent and judgment passes against him, which he necessity for a recovery back by the assignee satisfies on execution, cannot be said, withof the property conveyed in preference, there in the meaning of the statute, to have surnever could be any scope for the operation rendered to the assignee the property reof the 23d section in respect to a surren-ceived by him under such preference. He der."

has surrendered nothing." Thus clearly pointing out that by the As an alternative, however, to this view, surrender clause alone the creditor would and treating the sections referred to as in not be debarred from proving his claim, if pari materia, it was reiterated that § 23 in fact there had been a surrender, whether was limited and controlled by the penalty voluntary or not, but that, as a result sole provided in § 39. ly of the prohibition of § 39, the creditor We need not further notice the cases unwould be barred after recovery by the as- der the act of 1867, because of the action signee.

of Congress on the subject. In 1874 (18 Third. Cases which treated the surrender Stat. at L. 178, chap. 390) § 39 of the act clause as in and of itself forbidding a sur- of 1867 was amended and re-enacted. That render after recovery, because the recovery amendment consisted of omitting the forfeiauthorized by $ 35 was the antithesis of the ture clause as originally contained in the surrender and precluded a surrender after section, and substituting in its stead the recovery. This class of cases in effect treat- following proviso: ed the prohibition expressed in § 39 as un- “Provided,

and such person, if necessàry, quoad the subject-matters to a creditor, shall not, in cases of actual fraud which $8 23 and 35 were addressed. The on his part, be allowed to prove for more cases, however, were few in number, and than a moiety of his debt; and this limiare illustrated by the case of Re Tonkin, tation on the proof of debts shall apply to 4 Nat. Bankr. Reg. 52, Fed. Cas. No. 14,- cases of voluntary as well as involuntary 094.

bankruptcy." Fourth. Cases which, without seemingly Plainly, this amendment not only abol. considering the incongruity of the reason ished the penalty provided in § 39 as origiing, adopted both theories; treated $8 23, nally enacted, since it allowed a creditor to 35, and 39 as in pari materia, and hence prove his claim for the whole amount thereapplied the prohibition of g 39 to the other of after recovery against him if he had two sections, and yet reasoned to show that not been guilty of actual fraud, and, even

in case of actual fraud, after recovery, per- | (1879) 19

19 Nat. Bankr. Reg. 283, Fed. mitted him to prove for a moiety. The Cas. No. 7,627, per Nixon, D. J.; Re Cadamendment clearly also was repugnant to well (1883) 17 Fed. 693, per Coxe, J. that construction of the act of 1867 given The meaning of the amendment of 1874 was in some of the cases to which we have re-considered by the court of appeals of New ferred under the third classification, wherein York in the case of Jefferson County Nat. in the reasoning employed it was assumed Bank v. Streeter, 106 N. Y. 186, 12 N. E. that a forfeiture or penalty might be im- | 706. The New York court expressly adoptplied alone from the terms of the surrendered the construction given in the cases to clause, irrespective of the operation of which reference has just been made, and 39. This results from the very words of its action in so doing was affirmed by this the amendment, which says, "and this limi- court in Streeter v. Jefferson County Nat. tation on the proof of debts shall apply,” etc., Bank, 147 U. S. 40, 37 L. ed. 70, 13 Sup. Ct. showing that the restriction on the right Rep. 236. to prove after a compulsory yielding up of It follows that the construction which we a preference was deemed by Congress to re- at the outset gave to the text of the act of sult not from the surrender clause, but 1898, instead of being weakened, is abfrom the limitation expressly declared by $solutely sustained by a consideration of 39 as amended, which operated a qualifica- the act of 1867, both before and after the tion of the broad terms of the surrender amendment of 1874, and the decisions conclause. It manifestly also arises from the struing the same, since in the present act, fact that, whilst Congress plainly intended as we have said, there is nowhere found any by the amendment to make a change in the provision imposing even the modified penrigor of the rule previously obtaining, the alty which was expressed in the amendment phraseology of the surrender clause as orig- of 1874. The contention that, because the inally found in the act was not altered. act of 1898 contains a surrender clause,

After the adoption of the amendment of therefore it must be assumed that Congress 1874 it is true that in one or two instances intended to inflict the penalty originally imit was held that the amendment, instead of posed by § 39 of the act of 1867, must rest mitigating the severity of g 39 as it stood upon the erroneous assumption that that before the amendment, had increased it by penalty was the result of the surrender adding an additional limitation, viz., pro- clause alone. But this, as we have seen, hibiting a preferred creditor who had been is a misconception, since from the great guilty of actual fraud from proving for weight of judicial authority under the act of more than one half of his claim, even where 1867, as well as by the express enactment of he had voluntarily surrendered his prefer-Congress in the amendment of 1874 and the

But these were isolated cases, since decisions which construed that amendment, practically the otherwise universal con- it necessarily results that the penalty enstruction was that the amendment was reme- | forced under the act of 1867 arose not from dial and intended by Congress to mitigate, the surrender clause standing alone, but even in cases of actual fraud, the severity solely from the operation upon that clause of the prohibition of § 39 as originally en- of the express prohibition contained in § acted.

39 of that act. When, therefore, Congress The import of the amendment was tersely in adopting the present act omitted to restated by Mr. Justice Clifford in Re Reed, enact the provision of the act of 1867, from 3 Fed. 798, 800, as follows:

which alone the penalty or forfeiture arose, "Beyond doubt the question must depend it cannot in reason be said that the omission upon the true construction of the act of to impose the penalty gives rise to the imCongress, and I am of the opinion that Con- plication that it was the intention of Congress intended to moderate the rigor of the gress to re-enact it. In other words, it canprior rules and to allow the creditor, after not be declared that a penalty is to be enpayment back of the preference, whether by forced because the statute does not impose suit or otherwise, to prove their whole debt, it. in case they had been guilty of no actual And, irrespective of this irresistible imfraud.”

plication, a general consideration of the And such construction was also expounded present act persuasively points out the purin the following cases: Re Currier (1875) pose contemplated by Congress in refraining 2 Low. Dec. 436, Fed. Cas. No. 3,492; Burr from re-enacting the penalty contained in § v. Hopkins (1875) 6 Biss. 345, Fed. Cas. 39 of the act of 1867. Undoubtedly the No. 2,192, per Drummond, J.; Re Black preference clauses of the present act, dif(1878) 17 Nat. Bankr. Reg. 399, Fed. Cas. fering in that respect from the act of 1867, No. 1,459, per Lowell, J.; Re Newcomer as is well illustrated by the facts of this (1878) 18 Nat. Bankr. Reg. 85, Fed. Cas. case, include preferences where the creditor No. 10,148, per Blodgett, J.; Re Kaufman receiving the same acted without knowledge

»

.

of any wrongful intent on the part of the they had knowledge of such insolvency or debtor, and in the utmost good faith. Pirie not. V. Chicago Title & T. Co. 182 U. S. 454, By g 67, paragraph e, of the bankrupt act, 45 L. ed. 1179, 21 Sup. Ct. Rep. 906. Hav- it is provided : ing thus broadened the preference clauses “And all conveyances, transfers, or enso as to make them include acts never be cumbrances of his property, made by a debtfore declared by Congress to be illegal, it or at any time within four months prior to may well be presumed that Congress, when the filing of the petition against him, and it enacted the surrender clause in the pres- while insolvent, which are held null and ent act, could not have contemplated that void as against the creditors of such debtor that clause should be construed as inflict by the laws of the state, territory, or district ing a penalty upon creditors coming within in which such property is situate, shall be the scope of the enlarged preference clauses deemed null and void under this act against of the act of 1898, thereby entailing an un- the creditors of such debtor, if he be adjust and unprecedented result.

judged a bankrupt, and such property shall Our conclusion, therefore, is that the first pass to the assignee and be by him requestion propounded must be answered in claimed and recovered for the benefit of the the affirmative, and that the two other ques- creditors of the bankrupt.” tions require no response.

Under $ 60 of the bankruptcy act of And it is ordered accordingly,

1898 it was provided :

"a. A person shall be deemed to have Mr. Justice Day, dissenting :

given a preference if, being insolvent, he has I am unable to agree with the construc-procured or suffered a judgment to be ention given to the sections of the bankruptcy tered against himself in favor of any person, act under consideration, and, because of the or made a transfer of any of his property, importance of the questions involved, have and the effect of the enforcement of such deemed proper a statement of the conclu- judgment or transfer will be to enable any sions reached.

one of his creditors to obtain a greater perNotwithstanding the first question procentage of his debt than any other of such pounded by the court of appeals presupposes creditors of the same class. that the $2,000 mortgage was a preference

“7. If a bankrupt shall have given a prefwithin the meaning of the bankrupt act, it erence within four months before the filing is argued on behalf of the creditors that, al- of a petition, or after the filing of the pethough the mortgage made a few days prior tition and before the adjudication, and the to the bankruptcy proceedings and when the person receiving it or to be benefited therebankrupt was insolvent, was void under & by, or his agent acting therein, shall have 6343 of the Revised Statutes of Ohio, as

had reasonable cause to believe that it was amended April 26, 1898 (93 Ohio Laws, p. intended thereby to give a preference, it 290), read in connection with § 67, para- shall be voidable by the trustee, and he may graph e, of the bankruptcy act, it did not recover the property or its value from such constitute a preference which must be sur. person.” rendered preliminary to proof of the credit- In § 1, s 25, of the act of 1898, a “transor's claim because there was no actual fer” is defined to include the sale and every transfer of any property to the creditor, other and different mode of disposing of or and the only thing obtained was a void mort- parting with the property or the possession gage.

of property, absolutely or conditionally, as The Ohio statute makes provision, among a payment, pledge, mortgage, gift, or secuother things, as to sales, etc., in trust or

rity. otherwise, in contemplation of insolvency, or

This definition of a transfer covers a with a design to prefer one or more creditors to the exclusion, in whole or in part, in express terms, and § 60 provides that

mortgage given for the security of a debt of others, and sets forth: "And every such sale, conveyance, trans- preferences shall include transfers, the ef

fect of the enforcement of which would fer, mortgage, or assignment made, by any debtor or debtors, in the event of a

be to enable any one of the bankrupt's creddeed of assignment being filed within ninety itors to obtain a greater percentage of his (90) days after the giving (or doing] of debt than other creditors of the same class. such thing or act, shall be conclusively

It is true that if the mortgage is void deemed and held to be fraudulent, and it can have no effect to diminish the estate shall be held to be void as to the assignee of the bankrupt, but upon its face the mortof such debtor or debtors, where, upon proof gage is good as against the bankrupt and shown, such debtor or debtors was or were the creditors of the estate. actually insolvent at the time of giving or It is said that, the mortgage being void, doing of such act or thing, whether he or the creditor had nothing to surrender, but this assumes the invalidity of the security. count of which the preference was made or Until set aside or voluntarily surrendered given, nor shall he receive any dividend it is a good encumbrance upon the property, therefrom until he shall first have sur

, whether regarded as a conditional convey rendered to the assignee all property, money, ance or as a mere security for the debt. It benefit, or advantage received by him under could be set aside by the trustee upon proof such preference.” Section 57g of the present of insolvency of the bankrupt and other con act, prior to the amendment of February ditions named in the act at the time of giv- 5, 1903, required broadly that claims of ing it; otherwise it would stand as a valid creditors who have received preferences shall security, unless the creditor should elect to be surrendered, and that the same shall not surrender it and make proof of his claim as be allowed unless this is done. a general creditor.

Under the former act the surrender was There seems to be no question that, upon required of creditors who had accepted prefits face, though void in the light of the erences, having reasonable cause to believe facts found, this mortgage was one of the the same contrary to the provisions of the transfers of property which was invalidated act, and such creditor could not receive any by the act, it being given within the time dividend until he had first surrendered the limited, and at a time when the bankrupt preference. In passing the act of 1898, Conwas in fact insolvent, and expressly made gress doubtless had before it prior legislavoid by the Ohio statute when read with tion on the subject, and particularly the act the bankrupt act of 1898.

of 1867, the most recent enactment on the The answer to the first question requires subject. a consideration of § 57g of the act of 1898, Section 57g provides that all preferences, which, as it stood prior to the amendment whether innocent or otherwise, shall be surof February 5, 1903 (32 Stat. at L. 797, rendered before the creditor can prove his chap. 487), i read: “The claims of creditors claim, and the right of proof is not postwho have received preferences shall not be poned until the surrender, but claims are allowed unless such creditors shall surrender not to be allowed unless creditors shall surtheir preferences." May a creditor who has render their preferences. The element of received a preference, voidable by the act, time is indicated in the word "until,” which contest the validity thereof, and, if it is de- means to the time of, or up to, while the use clared invalid, still prove his debt upon sur- of "unless” more emphatically denies the render of his preference as though no con- right of proving the claim, save or except test had been had ?

upon terms of relinquishing the preference. It was held by this court in Pirie v. Chi- In view of the purpose of the bankruptcy cago Title & T. Co. 182 U. S. 438, 45 L. ed. act to make an equal distribution of the 1171, 21 Sup. Ct. Rep. 876, that a creditor bankrupt’s estate among creditors of the who had received a preference, although he same class and to avoid preferences made did not have reason to believe that one was within four months, I think, having in view intended, could only keep the property trans- the first question put by the circuit court ferred upon condition of refraining from of appeals, that the sections of the law in proof of the balance of his debt.

question must be construed to put a creditIt was pointed out in that case, in the or who has received a merely voidable prefopinion of the court by Mr. Justice Mc- erence, which could be recovered from him Kenna, that § 60 in its various provisions by the trustee, to his election between striv. permitted a creditor who had innocently re- ing to retain that which he has received, and ceived a preference to hold it if he chose, voluntarily surrendering his preference, and and it could only be recovered by the trustee filing his claim that he may participate with in the event that he had reasonable cause other unsecured creditors in the general disto believe that a preference was intended, tribution of the estate. in which case the trustee might recover the The law looks to a prompt, equal, and inproperty or its value. But the innocent expensive distribution of the estate among ereditor might keep the property transferred those entitled thereto, and I do not think it to him, although a preference within the was intended to permit a creditor to take definition of the act, upon terms of non- the chances of litigation with the trustee, participation in the bankrupt estate in the and, when defeated, still have the right to general distribution to the creditors. “surrender” his preference and participate

Section 23 of the bankruptcy act of 1867 in the distribution of the general estate. I provided: “Any person who, after the ap- think the surrender contemplated by the proval of this act, shall have accepted any law is not the capitulation which comes preference, having reasonable cause to be after unsuccessful resistance, but is intendlieve that the same was made or given by ed to require the creditor, who must be the debtor contrary to any provision of this presumed to know the law, to make a act, shall not prove the debt or claim on ac-prompt election and to stand or fall upon the 1 U. S. Comp. St. Supp. 1903, p. 415.

choice made. In other words it was not intend- preferences inust be surrendered as a condied to permit a creditor who holds security tion of proof of claims against the estate. liable to defeat under the law to keep it if The innocent holder of a preference could he can maintain it by successful contest, not be deprived of his right of election beand, if not, to have the same right and privi-tween proof of his debt and the surrender lege as to proof of his debt that he would of his preference. He who had a voidable have if he promptly availed himself of the preference might surrender it and prove his privilege of surrender, which the law gives debt. If he did not "surrender,” the trustee to one who would place himself upon a gen- could recover the preference, and the privieral equality with other creditors of the es- lege of proof which was conditioned upon tate.

surrender no longer existed. These conclusions are sustained by a con- Prior to the amendment of 1903 this sideration of the terms of the law under court in the case of Pirie v. Chicago Title & discussion, as well as the adjudicated cases T. Co. already referred to, decided that the which have arisen under it. The act of requirement extended to all manner of pref1898 made important changes when compared erences, whether innocently received' or with the bankrupt law of 1867. As we have otherwise, and this was the law until the already seen, § 23 of the latter act limited amendment of 1903. the requirement as to the surrender of pref- Therefore the sole question here is: What erences to those made or given contrary to is meant by the term "surrender” as used the provisions of the act. Section 35 of the in the act of 1898 ? same law gave the right to the assignee in We have been referred to four cases debankruptcy to set aside illegal preferences, cided under this law before the passage of and § 39, after enumerating certain trans- the amendment of 1903. Before passing to actions which should amount to acts of bank them I may refer to a decision of Judge ruptcy, including fraudulent conveyances as Dillon at the circuit (Re Richter, 1 Dill. therein described, provided that whenever 544, Fed. Cas. No. 11,803), rendered in 1870

, the beneficiary had reasonable cause to be under the act of 1867; but in defining the lieve that a fraud upon the act was intended, word “surrender,” and pointing out its or the debtor was insolvent, the assignee meaning, the language of the learned judge might recover the property, and the creditor is as pertinent now as it was then. Having should not be allowed to prove his debt in before him the construction of the term bankruptcy. In 1874 (18 Stat. at L. 178, “surrender" as used in § 23 of the act of chap. 390), § 39 of the act was amended, 1867, and speaking of the right of a creditor and, instead of prohibiting a creditor who to prove the balance of a claim which had had received a conveyance in fraud of the been illegally preferred, the judge said: act from proving his debt, it was provided “The statute is that they shall not prove that such creditor should not, in case of up the debt or claim on account of which actual fraud on his part, be allowed to prove the preference was given. It was this prefor more than a moiety of his debt, and this cisely which, by the motion under considerlimitation should apply to cases of volun-ation, they sought to have done, and which tary as well as involuntary bankruptcy. the court refused to allow.

It will not, in my view, aid in the deter- "It is urged by the claimants that this mination of the proper construction of the refusal was erroneous because they had, beact of 1898 to review the numerous and con- fore the time when they made their motion, flicting decisions made under the act of 1867 surrendered to the assignee all property reas to the effect of these various provisionsceived by them, under the preference. This upon the right of the creditor to prove his devolves upon us the duty of interpreting claim. The great weight of authority is the meaning of the word 'surrender,' as it that one who had a voidable preference un- is here used. And it is our opinion that a der the act could not be permitted to prove creditor who receives goods by way of his claim after a judgment had been ren fraudulent preference, and refuses the dedered against him in a contest with the trus- mand therefor which the assignee is autee.

thorized to make (15), denies his liability, Presumably with the provisions of the allows suit to be commenced by the assignee, act of 1867 before it, providing that in cer- defends it, goes to trial, is defeated and tain cases of fraudulent conveyance the cred-judgment passes against him, which he satitor could not prove his claim in bank-isfies on execution, cannot be said, within ruptcy, first as to the whole, and later as to the meaning of the statute to have sura half of the debt, and the limitations of the rendered to the assignee the property rerequirement to surrender preferences to ceived by him under such preference. those made in violation of the act, Congress "He has surrendered nothing. He aclaid aside these requirements, and broadly cepted a fraudulent preference and defended provided in § 57g of the act of 1898 that all' it to the last. Paying a judgment which