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WAGER V. HALL, 83 U. S. 584 (1872)

U.S. Supreme Court

Wager v. Hall, 83 U.S. 16 Wall. 584 584 (1872)

Wager v. Hall

83 U.S. (16 Wall.) 584


1. The transfer by a debtor who is insolvent of his property or a considerable portion of it to one creditor as a security for a preexisting debt, without making any provision for an equal distribution of its proceeds to all his creditors, operates as a preference to such transferee, and must be taken as prima facie evidence that a preference was intended unless the debtor or transferee can show that the debtor was at the time ignorant of his insolvency, and that his affairs were such that he could reasonably expect to pay all his debts.

2. Such a transfer, if made within four months before the filing by the party of a petition in bankruptcy, is in fraud of the Bankrupt Act and void.

Hall, assignee of Lakin, a trader in Brodhead, Green County, Wisconsin, filed a bill in the court below against Wager & Fales, merchants, of Troy, New York, to set aside a mortgage on lands in the said Brodhead, given by the said bankrupt to them for $3.000, to secure five payments, of $600 each, payable in six, twelve, sixteen, twenty, and twenty-four months, which mortgage and notes were executed December 15th, 1869, being twenty-four days prior to his filing his petition in bankruptcy, on the ground that it was given in violation of the Bankrupt Act. That act, in its 35th section, thus enacts: [Footnote 1]

"If any person, being insolvent, or in contemplation of insolvency, within four months before the filing of the petition by or against him, with a view to give a preference to any creditor or

Page 83 U. S. 585

person having a claim against him, . . . makes any . . . pledge, assignment, transfer, or conveyance of any part of his property, . . . absolutely or conditionally, the person receiving such . . . pledge, assignment, transfer, or conveyance, or to be benefited thereby, . . . having reasonable cause to believe such person is insolvent, and that such . . . pledge, assignment, or conveyance is made in fraud of the provisions of this act, the same shall be void, and the assignee may recover the property, or the value of it, from the person so receiving it, or so to be benefited."

The admitted case, stated favorably for the bankrupt, seemed to be thus:

Prior to 1854, Lakin was a clerk in Troy, and while there made the acquaintance of Fales (one of the defendants), who was a clerk at the same time. In 1854, Lakin went to Janesville, Wisconsin, and for two years worked as a clerk in a grocery store. Then he was in partnership with one Williston in the grocery business in Janesville, until the spring of 1858. Then he was a clerk for two years in Janesville and other places, during the last six months of which he was in the hardware store of one Richardson of Janesville. In 1860, Richardson started a branch hardware store at Brodhead, about twenty miles west of Janesville, and put the same under the control of Lakin, who received half of the profits for his services.

After about sixteen months, Lakin bought out Richardson and continued a general hardware business at Brodhead, making purchases of stoves from a firm in Troy which his former fellow clerk at Troy, Fales, had formed with one Wager under the name of Wager & Fales. His sales in 1862 and 1863 were about $15,000 a year, and from 1864 to 1870 from $20,000 to $28,000 per year. His invoice of goods on hand, taken in 1864, was $10,393.67. His invoice of goods taken September 13, 1865, was $8,450.77. Soon after that, he set agoing a branch store at Juda, near Brodhead, and his whole inventory, taken December 31, 1867, was $23,978.97.

In February, 1868, he sold out his entire stock of stoves and tinware to Spaulding & Brown, of Brodhead, for $6,000,

Page 83 U. S. 586

but continued to deal in hardware and agricultural implements.

Spaulding & Brown paid $2,000 cash down, and for the balance gave their note of $4,000, payable as fast as the stoves should be sold, and a considerable portion of this note remained unpaid January, 1870.

Up to April 1, 1868, Lakin's stock was in a rented wooden building, and then being in fear of fire, he resolved to build a brick store, and for that purpose borrowed, at that time, on long time, $3,000 of his father-in-law, Hayner, to be secured by mortgage on the store, and began to build the store on lots which he then owned. Hayner superintended the building of the store, and it was completed near the close of the same year, costing, aside from the lots, $8,500.

Hayner resided in Brodhead from April 1, 1868, to June, 1869, when he moved to Woodstock, Illinois, but he did not receive his mortgage until August 27, 1869.

Lakin commenced buying stoves of Wager & Fales (whose mortgage it was now sought to set aside) as early as 1863, and continued to buy from $300 to $4,000 per year from that time to and including 1867.

The debt for which Lakin gave the mortgage to Wager & Fales was mostly for stoves purchased by him in 1867 at four months' credit. At the time of purchase, it was agreed that Lakin should pay interest on all bills after maturity. Wager & Fales permitted the account to run until the notes and mortgage were given, he in the meantime making some small payments.

Lakin sold but few of the stoves bought of Wager & Fales during 1867, nor until he sold out his stove business to Spaulding & Brown, and the fact that he failed to realize on the stoves, and that he desired to build a new brick block during 1868, induced him to urge Wager & Fales to wait on him, and as their account was on interest, and there was nothing else to be done amicably, they consented.

When his store was completed, which was near the close of the year 1868, he found it had cost about double what he

Page 83 U. S. 587

had expected, and as he had not realized on the stoves, he asked for further time, again promising to pay interest.

On the 1st of February, 1869, Lakin wrote Wager & Fales hoping that they would "not get entirely out of patience with him or lose confidence in him," excusing himself for nonpayment, and telling them that he had "a good stock of goods, in a good brick store, well insured, and was in a better and safer condition than ever before."

On the 4th of March, 1869, Lakin, having again excused himself for nonpayment, and begged patience, after repeated requests for payment by Wager & Fales, who say they have already waited "very patiently," requested Wager & Fales to send him a statement of his account, and "several notes running as long a time as they could afford to let them, and that he would stamp, sign, and return them," and do his best to meet them when due. The matter rested in this way until one Johnson who had for several years been the traveling agent of Wager & Fales, and was then their partner, came West and saw Lakin with a view of getting money from him. Lakin asked for more time. Johnson told him he would give him time, but if he gave him long time that he ought to give a mortgage on his real estate. Lakin was reluctant to give a mortgage, and stated that he was perfectly responsible, more so than when the debt was incurred, and that if his matters were closed up under the hammer, he would have $15,000 over and above his debts, and offered to turn out notes against other parties, three dollars to one, but said that the times were hard, and that he depended upon farmers for collection. The matter was left open at Lakin's special request and on his assurance that a mortgage would injure his credit, and on his promise to pay certain stipulated sums monthly.

After Johnson got home, and about September, 1869, he gave Wager & Fales a detailed account of his interview with Lakin, and told them that he considered Lakin honest and responsible, that he required some time to make him easy in his business matters, and that he thought it was their duty to accommodate him by giving him time, for the reasons

Page 83 U. S. 588

that he had bought a great many stoves of them, and paid them a great deal of money, and probably would again, and was partly a Trojan, and out of their friendship for him; and then if he would give a ten percent mortgage, that would close up the account on the books of the old firm of Wager & Fales, now about to be reconstituted, with him, Johnson as a partner. In this Wager & Fales concurred.

The matter remained in that way until some time in October or November, 1869, when Wager & Fales sent the matter to Richardson to put in shape; the same Richardson already mentioned as the old principal of Lakin at Janesville, in 1860, and who was a friend as well of their own. Richardson and Lakin agreed upon terms, and Lakin was to get an abstract of title, execute the papers, and return them; but upon Richardson's submitting the proposition to Wager & Fales, they objected to certain portions of it, and Richardson informed Lakin that the matter must rest until he heard further from Wager & Fales. When he did hear, Lakin consented to their terms, and on the 15th of December, 1869, the mortgage and notes were given.

During the year 1869, including the last four months of that year, Lakin was in the habit of stating to all who questioned him in regard to his condition, that he was worth from $12,000 to $15,000 over and above his debts and liabilities.

So far as to the mortgage sought by this bill to be set aside.

Now as to the circumstances under which the petition in bankruptcy was filed.

About the 1st of September, 1869 -- that is to say, four months prior to filing it -- Lakin owed a certain Nazro about $2,400. During that four months, Nazro sold him over $500 worth of goods, and Lakin paid him during the same time over $400. His last purchase was over $200, and made November 26, 1869, and his last payment December 20, 1869.

On the 26th of December, 1869, a friend of Lakin, residing at Brodhead, went to Woodstock with a letter which he

Page 83 U. S. 589

had just received from a friend in Chicago, saying that a report had been sent by someone in Brodhead to the Mercantile Agency in Chicago, that Lakin had made an assignment of his property to his father-in-law, Mr. Hayner. Lakin went to Janesville and told his attorney of the report, gave him what, according to his own account, he supposed, at the time, to be a true statement of his affairs, that he owed about $12,000 besides what he owed Hayner on the mortgage above mentioned, and that he had goods, notes, accounts, and real estate, which in his opinion were worth $28,000 or $30,000, and asked for advice. His attorney advised him to make a statement of his affairs to his creditors, ask them for an extension, if necessary, telling them there was no truth in the report of the assignment, and to get his friends to endorse for him, the attorney saying that thus he thought there would be no trouble in arranging matters. Almost immediately some of his creditors, including an agent of Nazro, came to Brodhead to investigate his concerns. He and Nazro's agent made a statement of his condition, and on December 27 or 28, 1869, and after a considerable investigation, found that his debts were much larger than he had ever stated, and, as he alleged, much larger than he had ever supposed, being at least $23,000. Lakin then saw his attorney again, and told him how he had found matters, and was advised to send a full printed statement of his condition to each of his creditors. Lakin made and sent out such a statement, dated January 1, 1870, and it showed his debts to be $26,447.73.

Lakin, then in company with Nazro's agent, again counseled with his attorney, who advised him that as Nazro was one of his largest creditors and a man of great business experience, he had better go to Milwaukee with the agent, and confer with Nazro, and he did so. Nazro then requested Lakin to go into voluntary bankruptcy. Lakin expressed a wish to do what was best for his creditors, but told Nazro he thought his creditors would get more money if they would select someone as assignee, and that he would turn over everything he had to such assignee for the benefit of

Page 83 U. S. 590

his creditors. Nazro told Lakin that the securities he had given stood in the way of that, and unless he went into voluntary bankruptcy, would himself file a petition and force him into bankruptcy. Lakin then saw his attorney, and filed his petition in bankruptcy January 8, 1870.

Lakin's books were in a bad condition, and had been kept very loosely for years. The result was that his schedules in bankruptcy, dated February 2, 1870, showed his debts to be $28,450.

Lakin's particular friend, Richardson was on his paper during most of the last six months of the year 1869, and a company with which he was connected was a general creditor at the time of the failure. Lakin's father-in-law, Hayner, and his particular friend, Williston, were on his paper to a considerable amount at the bank at the time of his failure. A brother-in-law was a general creditor for $1,083. Several of his most intimate friends were general creditors.

So far as to the admitted case.

1. To show that Lakin was at the time of giving the mortgage to Wager & Fales insolvent, and that he gave them the mortgage with a view to give them a preference over his other creditors, the assignee called five witnesses, whose evidence tended to show that for one or two years prior to the failure, Lakin had found it difficult to raise money to pay certain claims against him, and at times had been unable to do so and been protested; that he used moneys in his hands as treasurer of the school district, and also as treasurer of the church, and also moneys held by him in trust and in a fiduciary capacity, and that they and some others in Brodhead regarded him irresponsible, but that during the same time he was doing a business of from $15,000 to $30,000 per year, and pretended to be worth $20,000 over and above all his debts. Two of these witnesses had, during the time, reported him to mercantile agencies as insolvent.

To rebut this evidence and to show that whatever might have been Lakin's actual condition, he never, prior to his failure, had any idea of stopping business or being unable

Page 83 U. S. 591

to pay all his debts, or that the mortgage would operate as a preference to Wager & Fales, but that he gave the mortgage to obtain a long extension so that he would not have to crowd his own creditors, or sell property for less than it was worth to pay his debts, and that this extension would give him more money to use in his business and pay other debts, the defendants called nine witnesses, whose evidence in addition to the facts, as above stated, tended to show that Lakin as treasurer of the school district and the church received no compensation, but by a sort of consent of the board of trustees used the moneys as he pleased, they drawing on him for the amounts as they might desire to use it; that there was no defalcation with either.

2. To show that Wager & Fales at the time of receiving this mortgage had reasonable cause to believe that Lakin was insolvent and that the mortgage was made in fraud of the provisions of the Bankrupt Act, the assignee called one witness. His evidence tended to show that he had had a conversation with the defendant, Wager, in November, 1869, in which Wager stated that he had made up his mind that Lakin was insolvent, but that the witness stated that he had recently been in Brodhead and that Lakin had assured him that he had property enough to pay all his debts, and he thought Lakin would pay dollar for dollar.

This testimony was contradicted by Wager.

In addition to this, there was the positive evidence of six witnesses, that Lakin had all the time represented himself to be worth from $12,000 to $15,000 over and above his debts, and that they all believed it.

The court below decreed that the mortgage was fraudulent, and should be discharged of record. The defendants appealed to this Court.

Page 83 U. S. 595

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