DOUBTFUL POINTS UNDER THE BANKRUPT LAW.

I.

THE thirty-ninth section of the Bankrupt Law, which enumerates what shall be deemed acts of bankruptcy, concludes the enumeration with the following clause: " or who, being a banker, merchant, or trader, has fraudulently stopped or suspended, and not resumed payment of his commercial paper, within a period of fourteen days."

Perhaps no single provision of the act has been discussed more frequently, or interpreted more variously, than this. Courts have differed widely as to its true construction; and the difference is of more importance than might at first be supposed, since it extends to one main purpose of the law.

Four interpretations have been suggested. It has been held, that the clause describes two acts: one, a fraudulent stoppage, and the other, a suspension for fourteen days, whether fraudulent

or not.

Again, that the two acts are a fraudulent stoppage, and a fraudulent suspension.

Another construction is, that only one act is defined, that "stop" and "suspend” are the ordinary synonyms of legislation, and that to constitute the act there must be a stoppage or suspension continued for fourteen days, and, in addition, proof of fraud.

Finally, it is suggested, that the last words define and explain the first. Those who adopt this view, hold that a suspension for fourteen days is what the law deems a fraudulent stoppage; and they read the clause "or who . . . has fraudulently stopped; that. is, suspended, and not resumed payment of his commercial paper, within a period of fourteen days."

The argument in favor of the first construction is well stated in the following language, quoted from a leading opinion on that side of the question:

"The provision embraces the two cases, the one of an original fraudulent stoppage of payment, in which the proceedings may be instituted at once, and the other, of a suspension not fraudulent, and not per se an act of bankruptcy, but which, if continued for more than fourteen days, becomes an act of bankruptcy by its continuance. It can hardly be supposed that

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Congress intended that the creditors of a banker, merchant, or trader, who had fraudulently stopped payment of his commercial paper, should be compelled to allow him fourteen days to consummate his fraudulent purposes, and perhaps secretly remove from the United States with the mass of his property, before they could take proceedings against him. But when the suspension of payment is from necessity and without fraud, the period of fourteen days is properly allowed the honest trader, that he may, in case he is solvent and only temporarily embarrassed, take the necessary measures to enable him to pay his dishonored paper, and prevent his business being broken up by proceedings in bankruptcy. . . . A suspension continued for a longer period may well be considered as evidence of hopeless insolvency, or of a want of adequate capacity to carry on his business, and as entitling his creditors to take proceedings to secure the application of his property to the payment of his debts.""

This view assumes that stoppage and suspension are distinct acts. The difference between them, however, is shadowy, and if it exists, it must be that stoppage is a refusal to pay without the intention of resuming, suspension, a refusal with that intention. Except in cases of fraud, the first would indicate hopeless insolvency, while the second might be caused by temporary embarrassment. Yet the case just cited holds, that if a petitioning creditor relies on the first, he must prove that it was fraudulent; if on the second, he need only prove that it has continued fourteen days; that is, the first was made an act of bankruptcy because it is evidence of fraud, and the second, because it is evidence of insolvency. If this was the intention of Congress, why was not simple stoppage, unaccompanied by fraud, made an act of bankruptcy, since it affords a much stronger presumption of insolvency than suspension?

On the other hand, is there any reason why a suspension, made for the purpose of enabling a debtor to remove or conceal his property, should continue fourteen days before his creditors can take advantage of it? Are not all the reasons against allowing a fraudulent stoppage to continue fourteen days equally conclusive against granting such indulgence to a fraudulent suspension? Yet if these are distinct acts, the section wholly fails to meet the case, either of an honest stoppage, or a fraudulent suspension which has continued less than fourteen days. Since, however, a refusal to pay is stoppage or suspension, according as it is or is not followed by

1 In re Wells, ex parte Claflin, B. R. Supplement, XXXVII.

resumption, and since this, of itself, would rebut the presumption either of fraud or insolvency, and thus render proceedings in bankruptcy unnecessary, in any supposable case the facts would present to the court a simple stoppage, and it may be said, that the difficulty above suggested would be avoided by holding it a stoppage when fraud was proved, and a suspension when non-resumption for fourteen days was relied on. This, however, can only be done if "stop" and "suspend" are practically synonymous; and to admit this, is to abandon the idea of two acts. The dilemma is simple. "Stop" and "suspend" either mean the same thing or they do not. If they do, only one act is described, a stoppage, which must be fraudulent, and must continue fourteen days. If they do not, Congress has made distinctions and omissions which are wholly unreasonable.

Still, though the words are synonymous, they are not to be regarded as entirely interchangeable, for then there would have been no reason for the change, and we should have had "fraudulently stopped, or stopped without resuming payment." This would have made the two acts clear, and would have covered every case; and it is evident, that if Congress had intended to describe two acts, such language as this suggested would have been used.

It is urged, however, that the interests of creditors will suffer, if a fraudulent stoppage is allowed to continue fourteen days. What is a fraudulent stoppage? A man may refuse payment of his paper on various grounds. He may refuse, because he denies his liability for some reason applicable to the paper itself. This is no evidence either of fraud or insolvency, and raises an issue to be tried by the proper tribunal. This can hardly be called stoppage; it certainly is not fraudulent. He may refuse, from inability caused either by temporary embarrassment or insolvency. In this case, since the necessary effect of stoppage is to leave his affairs in stato quo, creditors can hardly be prejudiced by letting it continue so short a time. So far from being fraudulent, such a stoppage is the debtor's duty, if he intends to become a bankrupt, and fourteen days is not an unreasonable time to allow him for the preparation of his petition and schedules. Lastly, he may refuse with a fraudulent intent, as to gain time for the removal of his property. It is difficult, however, to imagine any act from which a creditor could infer fraud, or which he could adduce to

prove his allegation, if he declared on a fraudulent stoppage, which might not itself be set forth in the petition as an act of bankruptcy, and in view of the liberal provisions in sect. 40, which authorize the court to order the arrest of the debtor, and the seizure of his property, if probable cause is shown for believing that the debtor intends to do any fraudulent act for the purpose of delaying his creditors, it is difficult to see how their interests can be affected injuriously by the construction contended for here.

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The conclusion to be drawn from the argument thus far is, that Congress, in this section, intended to describe only one act of bankruptcy; but there is still a difference between the advocates of the third and fourth constructions given above. That difference is simply this: both admit that the suspension must be fraudulent; but the first hold that fraud must be proved, the second, that it is a necessary conclusion of law from suspension continued fourteen days in other words, the first hold suspension an act of bankruptcy, when and because it is evidence of fraud; the second, when and because it is evidence of insolvency. The first give its full force to the word "fraudulently;" the second, explain it away. Their argument is this: suspension for fourteen days proves insolvency; if a trader "is insolvent, then he commits a fraud upon his other creditors by not having himself declared a bankrupt, and making a surrender of his property to be equally distributed among them: "therefore suspension for fourteen days is fraudulent.

This argument rests upon the assumption that under the Bankrupt Law it is the duty of every debtor, when he finds himself insolvent, to become bankrupt, and that it is the policy of the law to compel him, if he will not take this step voluntarily. Hence an act, which proves insolvency, is made the ground of compulsory proceedings. The question is whether this assumption is correct.

The object of our bankrupt system is to benefit both debtor and creditor. It is the policy of the system therefore to require nothing which is not for the interest of both. Now it is obvious that there must be many cases where it is for the interest of neither that an insolvent debtor should go into bankruptcy.

Insolvency is used in two senses. In the first it denotes absolute inability to pay one's debts; in the second, inability to pay them as they become due in the ordinary course of business. The last is meant when a banker, merchant, or trader is said to be

1 In re Jersey City Window Glass Co., Field, J., 1 B. R. 113.

sense.

insolvent. It must frequently happen, to illustrate, that a perfectly solvent merchant may find himself insolvent in the latter His property may be invested in a large stock of goods, which a temporary depression in the market makes it difficult to sell, or he may have embarked in a new enterprise, which requires a large outlay at first, but presents every prospect of eventual success. Is it a debtor's duty in such a case to break up his business or abandon his enterprise, or can it be for the interest of creditors to compel such a course? Christian mentions an instance, where a bankrupt's estate not only realized enough to pay his creditors in full, but £60,000 besides, which were restored to him by the commission. Here must have been great injury to the debtor with no corresponding advantage to the creditors. A case which arose in the Eastern District of Missouri illustrates the hardships which would result from the extreme view of an insolvent debtor's duty. In this case, a firm in insolvent circumstances, but with reasonable cause to believe that by indulgence on the part of their creditors they could succeed in a comparatively new undertaking, consulted freely with them. All the creditors but one consented to grant them what they desired, some unconditionally, others on the condition that all should join. One creditor thought the success of the enterprise improbable, and applied for an adjudication of bankruptcy against the firm on the ground of a suspension for fourteen days. This is a test case. The act says, "upon the petition of one or more of his creditors . . . shall be adjudged a bankrupt." The language is mandatory, and if suspension is an act of bankruptcy, independently of the motive, because it shows insolvency, the petitioner was entitled to a decree. The court says, " Mere insolvency is not of itself ground for involuntary bankruptcy, for a man actually insolvent may continue his business for years by renewals and extensions and indulgence on the part of his creditors, and ultimately not only pay all indebtedness with interest, but achieve success. His peculiar business may be such that if arbitrarily stopped by one creditor, debtors and creditors alike will be involved in a useless sacrifice, while continuing in business will be for the common benefit. If the design of the law is equality, why should one creditor, against the wishes of all the others, involve all in an unwished for, and it may be useless, sacrifice?" 2 This seems to be a correct statement of the law, 1 In re Benj. C. Gay, 2 B. R. 114, and cases cited. 2 In re J. P. Doan, 2 B. R. 182.