There can be no reasonable doubt that in January, 1870, when the bank commenced suit, Vanderhoof Bros, were insolvent. They had no assets except their stock in trade. Not to mention other debts, they owed the bank over $2,100. They had no money with which to pay,' and no means with which to raise money except their stock of merchandise, which at cost price did not more than equal the amount of their liabilities, and which, when sold by the sheriff, did not bring more than about one-third of what they owed. Plainly, they were insolvent. They were urged to pay, and only failed to pay because they could not; and this was the reason they declared to the bank. Surely a mercantile firm, having no property but their stock in trade, who, when pressed for a debt admitted to be just, give as a reason that they are unable to pay it, and suffer judgment to be rendered against them, is insolvent within any accepted or sound definition of that term, as used in the bankrupt act, and this, although the stock in trade may, at cost price or cash value, could it be sold for what it is worth, equal or exceed the trader’s liabilities. The notes held by the bank and on which its suit was brought were commercial paper, and one of them was, at the time suit was commenced, more than fourteen days past due, and was not paid simply because the bankrupts were unable to pay it. This was of itself an act of bankruptcy, and proof of insolvency. Shawhan v. Wherrett, 7 How. [48 U. S.] 644; Smith v. Buchanan [Case No. 13,016). And of all these facts the bank had notice.
I lay out of consideration as not sustained by the evidence the allegation of the bill that the Messrs. Vanderhoof procured the judgment to be rendered; nor is it shown that there was any collusion between them and the officers of. the bank with reference to the suit which the bank commenced. Undoubtedly the debtors would have preferred that suit should not have been brought; but payment being demanded which they were unable to make, and having no‘defence to the notes, and feeling friendly to the bank, and under obligations to .it, they suffered judgment to go against them, knowing, of course, that they could not meet it, and that their stock was liable to be, and probably would be, as it was, seized to pay it. Now under these circumstances, has the bank a right to hold the preference which it has sought to gain by its judgment and execution? If so the bankrupt act, known to have been framed to supersede .the system of preferences, and to place all unsecured creditors of an insolvent upon the same footing, is signally defective. If the debtors had turned out their goods to the bank in payment of these notes, clearly the bank could not, with its knowledge of their condition, have held them against the as-signee. Section 35. The act dissolved all attachments made within four months of its taking effect; and it is planted full of provisions intended to secure equality, and to prevent preferences. The bankrupts did not, before judgment, give notice to their other creditors in the same city or elsewhere that the bank had sued them. The motive of the bank in bringing suit was to secure their debt, and a knowledge of the condition of the debtors prompted the suit. The bank knew facts which, in law, showed their debtors to be in*969solvent and that they had committed an act •of bankruptcy in not paying one of the notes in suit when urged to do it.
As the debtors did not defend the action, nor give notice to other creditors that it had been brought, nor.go into.bankruptcy, and were insolvent, I have no difficulty in holding that they suffered judgment to go against them, and property to be seized on execution, with an intent to defeat the act.
Of these facts the bank was cognizant, and the requisite intent on the part of debtors to give, and on the part of the bank to obtain, an illegal preference may and should be inferred from the circumstances. These circumstances are the known insolvency (in the legal sense) of the debtors, the fact that they had committed an act of bankruptcy; that i they had no property but their stock in trade; ¡ That being pressed to pay, they were unable i to do so; that they gave no notice of the suit, j .and did not defend it, or go into bankruptcy, 1 nor otherwise make any effort to prevent i the judgment, levy, or sale; and that the effect of sustaining the execution proceedings j would be to allow one unsecured creditor to i make his whole debt, and leave the other cred- j itors nothing. To sustain the right of the j bank to the benefit of its judgment and levy, ¡ would subvert the bankrupt act. and if such a claim were maintainable, the bankrupt act would be speedily repealed, so as to allow all creditors to strive for preferences.
A decree should, in my opinion, be entered, establishing:the right of the assignee to the money produced by the sale of the goods, and ordering the defendant to pay the costs of this ! suit. ' :
The testimony shows that the property ; brought a good price, and I do not think we I should charge the defendant with the differ- i ence between what the property sold for, and ¡ its supposed market value at the time it was j seized.
It is proper to add that Judge NELSON is of opinion that the requisite intent to defeat the bankrupt act cannot be inferred from the circumstances above mentioned, and hence that the bank secured a valid lien on the stock by the judgment and levy.
NELSON. District Judge.I cannot assent to the conclusion of the circuit judge in this ease. I agree that Vanderhoof Bros., being merchants, had committed an act of bankruptcy. in not resuming payment of their commercial paper within a period of fourteen days after suspension, and were thus legally insolvent at the time the suit was commenced against them by the bank. I also agree, that when urged by the bank to pay, they told the cashier “that they had no money to pay their debts with, but their property was ample to meet all their liabilities.”
The bank, with knowledge of this condition of the debtors’ affairs, commenced suit upon several notes held by them against the •debtors, obtained a judgment by default, and the sheriff made a levy by virtue of an execution issued before the bankruptcy proceedings were instituted. The question is now presented: Did the debtors, by remaining passive while all these proceedings were progressing, from the time of the service of the summons down to the final levy under the execution, suffer their property, to be seized by legal, process, with intent to give preference to the bank, or with intent to delay and defeat the bankrupt act, and did the bank have reasonable cause to believe that a fraud on the act was intended?
The intent to prefer is a necessary ingredient of the charge made in the bill of complaint, and must be proved. There is no direct evidence to establish any consent by the debtors to the commencement of a suit against them, nor of collusion between them and the bank. They said nothing in their interview with the cashier at the time when informed by him, that the directors had determined to enforce the collections of the notes by a suit which would show any intention to give a preference.
“Johnson.” a creditor of the debtors, swears that one of them told him that he did not inform any of his other creditors of the proceedings instituted by the bank, because “he felt under obligations to the cashier.” This testimony is met by the debtor with an emphatic denial that he ever made any such statement; so that I am satisfied that the debtor said nothing which could fix any illegal intent upon him. The complainants’ counsel invokes the familiar principle that every person is presumed to intend the natural consequences of his acts, and contends that the result of all the proceedings instituted by the bank, and the conduct of the debtors enabled the former to obtain a preference, and therefore we must presume that the latter intended it.
I cannot give my assent to the application of this rule to the facts as they exist in the case. The debtors had no defence to the notes sued upon; the liability was incurred for a valuable consideration. The cashier knew all of the circumstances under which a large portion of the indebtedness had been created, and the judgment was obtained, not only without any act on the part of the debtors, but in spite of them. Any defence that the debtors might interpose would have been sham, and merely delayed the final judgment. The law of this state would not justify any such conduct on the part of the debtors. and no honest debtor would seek to delay a recovery of a just debt by interposing a sham defence. Upon this state of the case how can the judgment obtained .by due course of law, establish an intent to prefer the judgment creditor?
It is said oy counsel that the debtors should have defeated the action of the bank by voluntarily filing their petition in bankruptcy. I can find nothing in the law compelling an insolvent debtor to thus put himself into *970bankruptcy. Various reasons satisfactory to himself and in accordance with good faith, may influence him and prevent him from doing this. He may not wish to acknowledge, by so doing, that he is hopelessly ruined in his business; or he may think that he will still be enabled, with his property on hand, to arrange with his creditors by obtaining additional time within which to pay his indebtedness. Entertaining these views, I cannot believe that in this case, when the debtors have sworn' that they did not intend to give a preference, such intent can be fairly inferred because they did not seek the bankrupt court.
[The case was accordingly taken to the supreme court upon a certificate of division in opinion. The first two questions under discussion were decided in the negative, the third in the affirmative. 17 Wall. (84 U. S.) 473.] As to proof of fraudulent preference, see Gid-dings v. Dodd [Case No. 5,405]; Linkman v. Wilcox rid. 8,374]: Rison v. Knapp rid. 11,-861]; Martin v. Toof [Id. 9,167]; Wright v. Filley [Id. 18,077]. •If the judgment obtained under these circumstances does not substantiate the charge of an intent to prefer, did the further proceedings taken by the sheriff, to wit: a levy by virtue of an execution, establish the charge that the debtors suffered their property to be seized by legal process with intent to give a preference? The laws of this state provide that a judgment is a lien on real estate as soon as docketed, and points out the steps necessary to be taken to make it a lien on personal property. The law directed the sheriff in the discharge of his duties, and the lien became perfect upon the property in controversy here, without any participation of the debtors in the matter. The lien having been thus obtained, before bankruptcy proceedings were instituted, in my opinion, is protected by the act. If it is not to be recognized as valid, but is to be regarded as obtained in violation of the act, and a fraud upon it, congress must say so,( or the supreme court so decide.
The Circuit Judge being of the opinion that the assignee should recover, a certificate of division was ordered, on questions stated: [1. Whether or not an intent on the part of said debtors, Vanderhoof Brothers, to suffer their property to be taken on legal process, to wit: the said execution, with intent to give a preference to said bank, or with intent thereby to defeat or delay the operation of the bankrupt act, can be inferred from the foregoing facts. 2. Whether, under the said facts, the said bank, in obtaining said judgment, and making the said levy, had reasonable cause to believe that a fraud on the bankrupt act was intended? 3. Whether, under said facts, the bank obtained, by. the levy of its execution, a valid lien on the said goods as against the assignee in bankruptcy?] 2
[From 5 N. B. H. 270.]