In re Salmon

ROGERS, Circuit Judge

(after stating the facts as above). [1] The question presented is whether a payment, made by one who knows he is insolvent at the time, and which he directs to be applied to his credit, and which is made to one who has no knowledge of the insolvency of the payor, takes the debt out of the statute of limitations, so that it can come in and share in the assets in the bankruptcy court pari passu with the other claims. We are satisfied that the question must be answered in the affirmative.

A statute of limitations does not extinguish a debt. It goes to the remedy, and not to the cause of action. It is merely a personal privilege which the debtor may waive or assert at his election. The cases are so numerous to that effect that it is not necessary to cite them. In Quantock v. England, 4 Burr. 2628 (1770), which was an action by the assignees of a bankrupt, Lord Mansfield said:

“It is settled ‘that the statute of limitations does not destroy the debt’; it only takes away the remedy. The debtor may either take advantage of the statute of limitations, if the,debt be older than the time limited for bringing the action; or he may waive this advantage, and, in honesty,,he ought not to defend himself by such a plea. And the slightest word of acknowledgment will take it out of the statute. Here tlie debtor himself has not objected; he has submitted to the commission, and" been examined under it. Therefore the objection does not now lie in the mouth of a third person.”

The other three judges concurred with the Chief Justice. Such has been the law in England ever since.

In Campbell v. Holt, 115 U. S. 620, 6 Sup. Ct. 209, 29 L. Ed. 483 (1885), the Supreme Court held that the statute of‘ limitations does not, after the prescribed period, destroy or discharge the' debt. The debt and the obligation to pay it remains. The debtor is simply permitted, if he elects to do so, to plead the statute as a bar. The Legislature could repeal the statute after the period had run and the bar had been created, and then the creditor might sue .and recover on his cause of action, and the constitutional rights of the debtor would not be violated by the legislation. The court, in its opinion written by Mr. Justice Miller, said:

“We certainly do not understand that a right to defeat a just debt by the statute of limitations is a vested right, so as to be beyond legislative power in a proper casé. * * * We can understand a right to enforce the payment of a lawful debt. The Constitution says that no state shall pass any law impairing this obligation. But we do not understand the right to satisfy that obligation by a protracted failure to pay. We can see no right which the promisor has in the law which permits him to plead lapse of time, instead of payment, which shall prevent the Legislature from, repealing that law, because its effect is to make him fulfill his honest obligation.”

The court pointed out that a distinction in this respect exists 'between statutes of limitation which bar an action to recover real or personal property and those which bar the recovery of a debt. And in Hulbert v. Clark, 128 N. Y. 295, 28 N. E. 638, 14 L. R. A. 59 (1891) the New York Court of Appeals, through Judge Earl, asserts, although in á dictum,' a dike doctrine. A somewhat analogous question to that arising in the-instant'case arose in New York before the Supreme Court, General-Term, Second Department, in Lawrence v. Harrington, 48 Hun, 618, 1 N. Y. Supp. 577 (1888).. In that case, after a debtor had obtained his discharge in bankruptcy, he made a payment on certain promissory notes included in his discharge, and it was held that both as against the bankrupt’s discharge and the statute of limitations the old debt was restored, and a judgment obtained thereon was affirmed.

[2] There’ can be no question, we think, but that the payment which the bankrupt made was intended to apply upon the debt. The District Judge, differing therein from the referee, thought that as there was no other debt between the pa'rties, and as the bankrupt asked to have the note applied to his-credit, there could be no possible question that he intended to malee a part payment. . That is the proper inference to be drawn-under the circumstances. ■ . -

[3] We also agree with the District Judge that the facts do noi disclose a preference. To constitute a voidable preference under the Bankruptcy Act, the person receiving the payment, or to be benefited by- it, must have had reasonable cause to believe that the debtor was at the time insolvent and that the payment would effect a preference; and insolvency under the act means something more than that the debtor was financially embarrassed and hard pressed by his creditors. This condition may exist, and the debtor still lie solvent, so that if the executor, who received payment, simply knew that the debtor said that, he was having difficulty in financing his'firm, it would not taken alone be reasonable cause to believe him insolvent, especially in view of the fact that he had made the same remark a year before, and had thereafter told him that he had “financed” and was “all right again.” The law is well established that, even if the creditor entertains doubts concerning the solvency of the debtor, it is not enough. He must have a knowledge of such facts as will carry him beyond this and furnish a reasonable ground to believe that the payment will give him preference over other creditors.

The fact that other creditors as a result must share with the estate of Hamilton TL Salmon in the assets of the bankrupt is no injustice to them. Their claims and the claim of the estate are alike the honest-debts of the bankrupt, and the moral obligation is the same as respects each, and it is a maxim of equity that equality is equity.

The order is reversed, and the District Court is directed to reinstate the expunged claim.