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[227 U.S. 575, 576] Messrs. Abram I. Elkus and Garrard Glenn for appellant.
Mr. Justice Lamar delivered the opinion of the court:
Van Iderstine, trustee of Fellerman & Son, brought suit in the United States district court for the southern district of New York to set aside a transfer of accounts made to the National Discount Company as security for a loan, alleging that it was a fraudulent conveyance, and that the lending company was charged with notice of Feller- [227 U.S. 575, 580] man's intent to defraud. It is unnecessary to state the facts further than to say that Fellerman and his firm were insolvent, though rated at $50,000 to $75,000 in the Commercial Reports. Having been recommended by another merchant, he applied to the Discount Company to learn the terms on which he could borrow with book accounts as security. He was informed as to the method of doing business and the terms on which it would lend money, which, besides interest, included its customary charge of 5 per cent of the face of the accounts for services in connection with correspondence, collections, and the like. He returned in a few days with a number of accounts, and applied for a loan of $3,000, stating that he was pressed for funds and needed the money for the purpose of paying a note which matured that day. The accounts were transferred, the money was advanced, and Fellerman used it to take up a note, in bank, which had been indorsed by his son-in-law. Two or three days afterwards another loan of $1,000 on similar security was made, and the parties are at issue as to whether the money was used for paying a debt or went into the general funds of the firm and was checked out for other purposes. The day following the last loan a petition in bankruptcy was filed, and after adjudication a trustee was elected. He then brought this suit to have the transfer set aside and to compel the Discount Company to account for the collections made by it.
The district judge called in a jury to pass upon the disputed fact. After the introduction of the evidence, which was very conflicting, the court charged the law relating to fraudulent conveyances and the necessity of showing that there had been an intent on the part of Fellerman to defraud, and that the Discount Company had knowledge of such purpose. He, however, refused to charge that it was not fraudulent for the company to advance money to be used by Fellerman in paying legitimate debts, [227 U.S. 575, 581] and instead instructed them that a preference was as much within the terms of the act as though Fellerman had concealed the money from his creditors. The jury made no special finding, but rendered a general verdict in favor of the trustee. It was approved by the district judge, who refused to grant a new trial, and entered a judgment against the company.
The circuit court of appeals ( 98 C. C. A. 300, 174 Fed. 518) made a statement of fact in which if found that it was doubtful if Fellerman intended to defraud; but, if he did, the Discount Company did not know thereof, and was not charged with knowledge by any of the circumstances surrounding the transaction, or by the fact that Fellerman borrowed on hard terms, upon the security of book accounts. It therefore reversed the judgment of the district court, and directed that the complaint be dismissed. The trustee then brought the case here by appeal.
The general verdict of the jury cannot be treated as a finding that there was an intent to defraud of which the Discount Company had knowledge. For whatever view they may have taken on that issue, the verdict in favor of the trustee was practically demanded by the instructions given. For the district court charged in effect that the transfer was to be treated as a fraudulent conveyance if the Discount Company made the loan with the knowledge that the money was to be used in paying an existing debt. The finding can therefore be treated as the jury's observance of the instructions, since it was admitted that Fellerman, in applying for the loan, stated that he needed the money for the purpose of paying a debt due that day in bank. In the absence of any other special finding in the case, and bearing in mind that the verdict of the jury was only advisory, the case being one in equity, we agree with the circuit court of appeals, which held that the Discount Company had no knowledge of any intent on the part of Fellerman to defraud. If so, its de- [227 U.S. 575, 582] cree directing the complaint to be dismissed must be affirmed, unless, as matter of law, the transfer is to be treated as a fraudulent conveyance, in view of the fact that the company knew that the money was to be used in paying an existing debt.
Conveyances may be fraudulent because the debtor intends to put the property and its proceeds beyond the reach of his creditors; or because he intends to hinder and delay them as a class; or by preferring one who is favored above the others. There is no necessary connection between the intent to defraud and that to prefer, but in asmuch as one of the common incidents of a fraudulent conveyance is the purpose on the part of the grantor to apply the proceeds in such manner as to prefer his family or business connections, the existence of such intent to prefer is an important matter to be considered in determining whether there was also one to defraud. But the two purposes are not of the same quality, either in conscience or in law, and one may exist without the other. The statute recognizes the difference between the intent to defraud and the intent to prefer, and also the difference between a fraudulent and a preferential conveyance. One is inherently and always vicious; the other innocent and valid, except when made in violation of the express provisions of a statute. One is malum per se and the other malum prohibitum,-and then only to the extent that it is forbidden. A fraudulent conveyance is void regardless of its date; a preference is valid unless made within the prohibited period. It is therefore not in itself unlawful to prefer, nor fraudulent for one, though insolvent, to borrow in order to use the money in making a preference. So that, even if the Discount Company knew that Fellerman borrowed the money in order to pay off an honest debt, the transfer would not have been subject of attack by the trustee, except for the fact that a petition in bankruptcy was filed within four months thereafter. But the institution of [227 U.S. 575, 583] such proceedings did not relate back and convert a lawful transfer into a fraudulent conveyance.
Cases under the present statute, like Re Beerman, 112 Fed. 663, relied on by the trustee, relate to transactions in which the mortgagee was practically the representative of the preferred creditor, and where, consequently, the conveyance was as much subject to attack as though it had been made directly to him. But here the Discount Company was not a creditor of Fellerman & Son, and had no relation with the persons to whom the money was paid. National Bank v. National Herkimer County Bank, 225 U.S. 178 , 56 L. ed. 1042, 32 Sup. Ct. Rep. 633. The transfer, therefore, was not a preference to the Discount Company, and could not be set aside without proof that it knew that Fellerman not only intended to pay some of his creditors, but to defraud others. The difference between the two classes of cases is authoritatively recognized by Coder v. Arts, 213 U.S. 223 , 53 L. ed. 772, 29 Sup. Ct. Rep. 436, 16 Ann. Cas. 1008, where it was said that 'an attempt to prefer is not to be confounded with an intent to defraud, nor a preferential transfer with a fraudulent one.'
The circuit court of appeals applied this principle in the present case. Having found that the Discount Company had no knowledge of any intent to defraud, and the evidence supporting that finding, the conveyance cannot be set aside, whether the money was used to pay an existing debt, or, as claimed, a part was deposited with the general funds of the firm.
It is contended that even if the finding of the Circuit Court of Appeals was correct, it should not have ordered the complaint to be dismissed, since the company itself only asked for a new trial. But error was assigned not only on the refusal to set aside the verdict, but on the failure to enter a decree in favor of the Discount Company. The facts found by the Circuit Court of Appeals warranted a dismissal of the complaint, and the decree is affirmed.
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Citation: 227 U.S. 575
Docket No: No. 136
Decided: February 24, 1913
Court: United States Supreme Court
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