affairs existing, and to meet or pay such of its obligations as it desired to pay, when paying some of its creditors to the necessary and inevitable exclusion of others of its creditors, this corporation, the now bankrupt, collected in everything due it, sold some of the demands due it at a considerable discount, sold moneys due it from the state, but withheld as security for the soundness of work done under its contracts, and also sold and disposed of substantially all its other personal property, including machinery, tools, etc. (it had no real estate), and in so doing disabled itself from carrying on its business or performing its contracts. It retained some tools, etc., worth perhaps $3,000 to $5,000, and allowed some of its employés in one of the down river counties to continue work for a time, but never paid them. With the proceeds of these collections and sales the company paid Mr. Powers some $18,000, to other creditors, largely friends, about $20,000, and left creditors, including about $3,000 of labor claims, entirely unpaid and unprovided for. All this, this company, through its officers and managers, well knew. There was some attempt to claim that it hoped, and even expected, to continue its business, and that it expected to perform certain outstanding contracts from which it would derive profits and be able to pay its remaining creditors. The evidence shows beyond question that the officers and managers of the company had no such real hope, and no such expectation or purpose, but intended to go out of business as it did. I must and do find that in so converting its property into money and disposing of it, and when it did so, it acted, as did its officers and managers, with the purpose and intent of giving a preference to the particular creditors so paid and to the exclusion of those not paid. This was the direct and inevitable and well-known effect and consequence of what the company and its officers and managers did.

Section 67e of the Bankruptcy Act of 1898, as amended (Comp. St. § 9651), provides as follows:

"That all conveyances, transfers, assignments, or incumbrances of his property or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this act subsequent to the passage of this act and within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration; and all property of the debtor conveyed, transferred, assigned, or incumbered as aforesaid shall, if he be adjudged a bankrupt, and the same is not exempt from execution and liability for debts by the law of his domicile, be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee, whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of the creditors. And all conveyances, transfers, or incumbrances of his property made by a debtor at any time within four months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the creditors of such debtor by the laws of the state, territory, or district in which such property is situate, shall be deemed null and void under this act against the creditors of such debtor if he be adjudged a bankrupt, and such property shall pass to the assignee and be by him reclaimed and recovered for the benefit of the creditors of the bankrupt. For the purpose of such recovery any court of bankruptcy as hereinbefore defined, and any state court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction."

[4] It is claimed by this plaintiff that these transfers of its property made by the company with the intent stated were and are void under the provisions of section 66 of the Stock Corporation Law of the state of New York, and that the plaintiff may recover same under the provisions of section 67e of the Bankruptcy Act, above quoted, expressly that part wherein it is provided as follows:

"And all conveyances, transfers, or incumbrances of his property made at any time within four months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the creditors of such debtor by the laws of the state, territory or district in which such property is situate, shall be deemed null and void under this act against the creditors of such debtor if he be adjudged a bankrupt, and such property shall pass to the assignee (trustee) and be by him reclaimed and recovered for the benefit of the creditors of the bankrupt."

If these transfers of money to these creditors, or those made to the defendant Thomas F. Powers by this company in payment of notes and the account for legal services, were and are void under the provisions of section 66 of the Stock Corporation Law of the state of New York (Consolidated Laws of N. Y. 1909, vol. 5, p. 5782), then the plaintiff, as trustee in bankruptcy of the now bankrupt company, may reclaim and recover the same for the benefit of the creditors of such bankrupt, unless the surrender by Powers of the written guaranty above referred to, after the payment of such notes and accounts, operates to defeat such right of recovery. Section 66 of the Stock Corporation Law, so far as necessary to recite same here, reads as follows:

"No conveyance, assignment or transfer of any property of any such corporation [one that has refused to pay any of its notes or other obligations, when due, in lawful money] by it or any officer, director or stockholder thereof, nor any payment made, judgment suffered, lien created or security given by it or by any officer, director or stockholder when the corporation is insolvent or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporation, shall be valid, except that laborers' wages for services shall be preferred claims and be entitled to payment before any other creditors out of the corporation assets in excess of valid prior liens or incumbrances. * Every person re

ceiving by means of any such prohibited act or deed any property of the corporation shall be bound to account therefor to its creditors or stockholders or other trustees. * * * Every transfer or assignment or other act done in violation of the foregoing provisions of this section shall be void."

Under the provisions of section 67e of the Bankruptcy Law (30 Stat. 564, and 32 Stat. 800), and those of section 66 of the Stock Corporation Law of the state of New York, above quoted, it is immaterial what the intent and purpose of Mr. Powers was, and whether or not he knew of the insolvency of the construction company, and had reasonable cause to believe the receipt and retention by him of the payments made would operate as a preference. Grandison v. Robertson et al., 231 Fed. 785, 790, 145 C. C. A. 605, 610 (C. C. A. 2d Circuit). The Circuit Court of Appeals said and held:

"It is to be observed that under the Bankruptcy Act a preferential payment, to be voidable, must have been received by one who had 'reasonable cause to believe' that it would effect a preference; while under the New York Stock Corporation Law the invalidity of the payment is not made to depend upon the

knowledge of the one receiving the payment that it is a preferential payment, or upon his having reasonable cause to believe that it is a preferential payment. It depends upon whether the corporation or its officers in making the payment did so with the intent of giving a preference to any particular creditor over other creditors. Under the New York statute the invalidity of the payment is conditioned on two facts: (1) The corporation must have been at the time of payment insolvent, or its insolvency must have been imminent. (2) The payment must have been made (not received) with the intent of giving a preference to a particular creditor over other creditors of the corporation."

When the payments to Powers were made, the Ruddy & Saunders Construction Company was hopelessly insolvent, and it and its officers and managers well knew the fact, and the payments were made to Mr. Powers with the intent and purpose on the part of said company and its officers and managers making the payments of giving a preference to that particular creditor over other creditors of the corporation. It is immaterial on this branch of the case what the knowledge or intent of Mr. Powers was.

[5] Did the surrender, after the notes were paid, to Mr. Patrick E. De Lee of his written guaranty, held by Mr. Fowers, operate in any way to defeat recovery by this plaintiff? The notes were not indorsed by Mr. De Lee, or by any one. The guaranty was a separate written instrument, and read as follows:

"For value received I guarantee the payment to Thomas F. Powers of all loans now or hereafter made by him to the Ruddy & Saunders Construction Company."

It was signed by Patrick E. De Lee.

The Stock Corporation Law referred to also provides:

"No such conveyance, assignment or transfer shall be void in the hands of a purchaser for a valuable consideration without notice."

The defendant, Mr. Powers, cites Perry v. Van Norden, 192 N. Y. 189, 84 N. E. 804, as authority for the proposition that, having surrendered this written guaranty after payment of the notes, he has lost his security in consideration of other property transferred to him by the insolvent corporation, and that he comes within the status or position of "a purchaser for a valuable consideration without notice." In Perry v. Van Norden, supra, the trust company, defendant, held three notes of a hat company, not due, all indorsed by one F., who was and continued to be perfectly responsible financially. The hat company deposited $1,000 cash with the trust company and borrowed. $3,000 of it on its promissory note, secured by an assignment of certain of its assets and accounts. With the $4,000 it then paid and took up its notes first mentioned before due, and by such act released the indorser on the notes, as they were never presented for payment or protested. By and because of this transfer of such assets and accounts the hat company became insolvent and was thrown into bankruptcy, and the trustee sued the trust company to recover the value of such accounts and assets so transferred. The Court of Appeals said:

"We have doubts whether the intent of the hat company in this transaction was to prefer the appellant [the trust company]. The latter was not affected by the exchange so long as the indorser was responsible. The object and result of what was done was doubtless the protection and relief of the indorser."

The court also held that the trust company

"did not at the times mentioned know or have cause to believe that said company [hat company] was insolvent, or have any knowledge or notice of any intent on the part of said company or its officers to give a preference, nor did it have any intent to acquire a preference."

The court then held that under such circumstances the trust company was not subject to the provisions of the statute prohibiting preferences, but was within the protection of those other provisions enacted for the benefit of purchasers for a valuable consideration and without notice. The purpose and intent of the hat company is perfectly plain. It was desired to release the indorser, and this was accomplished by a deposit of $1,000 and the substitution and discount with the trust company of the unindorsed note of the hat company for $3,000, secured by the assignment of the accounts and assets of the hat company and the use of such deposit and proceeds of such new note to take up the old notes. By this transaction the trust company was secured and the indorser released at the expense of the general creditors of the hat company. The liability of the indorser was contingent only. The notes had not become fixed liabilities against the indorser, and he received nothing. As the old notes were surrendered and canceled before due, they could not be presented for payment and payment demanded, and this was not done, and there was no protest, and hence the trust company had lost all claim against the indorser, who took no part in the transaction. The court further said:

"Before this action was commenced all of said notes taken up as aforesaid had become due, and, of course, they were not by the appellant [the trust company] presented for payment or protested, and so far as appears the indorser was not a party to the transaction whereby they were taken up and protest lost, and no offer has been made to restore to appellant its original rights with respect to said notes."

In the instant case there was no indorsement of the notes and no right of protest lost. Nor has there been any loss of right of action on the part of this defendant, Powers, against De Lee, who executed the guaranty. De Lee has not paid anything, or lost anything, or surrendered any right he had against any one. Certainly Mr. Powers gave no consideration to the Ruddy & Saunders Construction Company, except as he surrendered the notes when paid; but this does not make him a purchaser for a valuable consideration without notice. If Powers became, or came into the position of, a purchaser for a valuable consideration without notice, it was for the reason he surrendered his notes on receipt of the moneys due and unpaid thereon, and also surrendered the written guaranty of Mr. De Lee, and by such surrender lost all right of action against him. In other words, was there a good and sufficient, or an adequate, valuable considera255 F.-38

tion given by Powers for such transfer of the money of the corporation to him?

[8] As a general rule the guarantor is discharged by the payment and satisfaction of the debt guaranteed. But to discharge the guarantor the payment must be a legal and a valid one. "But the payment must be valid and binding in order to release the guarantor." 20 Cyc. 1475. In Maxfield v. Jones, 76 Me. 135, it was held that where notes were paid by a sale of property, and in bankruptcy proceedings the sale was declared void; the consideration for the surrender of the notes had failed. If the payment is made by giving a forged note in place of the original, the guarantor is not released. Bass v. Inhabitants of Wellesley, 192 Mass. 526, 78 N. E. 543; Allen v. Sharpe, 37 Ind. 67, 10 Am. Rep. 80; Kincaid v. Yates, 63 Mo. 45; Bank v. Buchanan, 87 Tenn. 32, 9 S. W. 202, 1 L. R. A. 199, 10 Am. St. Rep. 617. So, if the payment is made with the obligation of one under such a disability that the new obligation cannot be enforced, the guarantor is not released. Godfrey v. Crisler, 121 Ind. 203, 22 N. E. 999. So "the payment of the debt by the principal to discharge a debt must be a valid payment in order to release the guarantor." Winsted Bank v. Webb, 39 N. Y. 325, 100 Am. Dec. 435. See 4 N. Y. Annotated Digest, 185. In this last case payment was made of six valid notes by the giving of six notes which were void for usury, and it was held that the indorsers on the original notes were not discharged by such payment, although the original notes were surrendered and canceled. See, also, Lee v. Peckham, 17 Wis. 383.

Clearly the payments to Mr. Powers were not valid payments. They were made by the construction company in direct violation of law, of both the Stock Corporation Law of New York, supra, and of the Bankruptcy Act, which latter declares, as stated in subdivision "e" of section 67, that transfers of property made or given by a person adjudged a bankrupt within four months prior to the filing of the petition, and these payments or transfers were so made, with the intent or purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of the debtor, except as to purchasers in good faith and for a present fair consideration. These payments of money constituted transfers of property, and were made with the intent specified, and there was no present consideration.

In addition to the Maine case, cited above, we have English cases directly in point. In Petty v. Cooke, L. R. 6 Q. B. 789, the defendant, on the face of the note was a maker, but in fact he was surety only. The note was paid by the principal, but in bankruptcy proceedings he was compelled to surrender such payment. It was held the surety was not discharged and was liable to the holder of the note. In Pritchard v. Hitchcock, 6 Man. & Granger 151, 46 Eng. C. L. R. 149, the defendant in a separate agreement guaranteed the payment of two bills of exchange. The acceptor thereof paid the money due the plaintiff. Later these payments were set aside as constituting fraudulent preferences. It was held the guarantor was not discharged by such