In some states assignments which attempt to create a preference are void and the as signment is for the equal benefit of all credi tors. In other states they are allowed. Pref erences are usually invalidated by bankrupt acts. By the bankrupt act of July 1, 1898, as amended Feb. 5, 1903, and June 25, 1910, it was provided as follows : (a) A person shall be deemed to have given a preference if, being insolvent, he has, with in four months before the filing of the peti tion, or after the filing of the petition and be fore the adjudication, procured or suffered a judgment to be entered against himself in fa vor of any person or made a transfer of any of his property, and, the effect of the enforce ment of such judgment or transfer will be to enable any one of his creditors to obtain a greater portion of his debt than any other of such creditors of the same class. Where the preference consists of a transfer, such pe riod of four months shall not expire until four months after the date of the recording or registering of the transfer, if by law such recording or registering is required.
(b) If a bankrupt shall have procured or suffered a judgment to be entered against him in favor of any person or have made a transfer of any of his property, and if at the time of the transfer, or of the entry of the judgment or of the recording or register ing of the transfer, if by law recording or registering thereof is required, and being within four months before the filing of the Petition in bankruptcy, or after the filing thereof and before the adjudication, the bankrupt be insolvent, and the judgment or transfer then operate as a preference, and the person receiving it or to be benefited thereby, or his agent, shall then have rea sonable cause to believe that the enforcement of such judgment or transfer would effect a preference, it shall be voidable by the trus tee and he may recover the property or its value from such person. Concurrent juris diction is in the bankruptcy court and the proper state court.
(c) If a creditor has been preferred and afterward in good faith gives the debtor further credit without security of any kind for property which becomes part of the debt or's estates, the amount of such new credit remaining unpaid at the time of the adjudi cation in bankruptcy may be set off against the amount which would otherwise be re coverable from him.
(d) If a debtor, in contemplation of the filing of a petition by or against him, shall pay money or transfer property to his attor ney for services to be rendered, the transac tion shall be re-examined by the court and held valid to the extent of a reasonable amount and the excess may be recovered by the trustee.
To constitute a preference it must appear that, at the time, the debtor was insolvent, that he intended a preference, and that the transferee had reasonable ground to believe that a preference was intended ; In re Leech, 171 Fed. 625, 96 C. C. A. 424; In re First N. Bk., 155 Fed. 100, 84 C. C. A. 16 ; there must be a parting with the bankrupts' property for the benefit of the creditor and a subse quent diminution of his estate ; Continental & Commercial T. & S. Bk. v. Trust Co., 229 U. S. 435, 33 Sup. Ct. 829, 57 L. Ed. 1268 ; N. Bk. of Newport v. Bank, 225 U. S. 178, 32 Sup. Ct. 633, 56 L. Ed. 1042.
There is a difference between intent to de fraud and intent to prefer—the former is malum per se and the latter malum prohibi tum, and only to the extent forbidden ; Van Iderstine v. Discount Co., 227 U. S. 575, 33 Sup. Ct. 343, 57 L. Ed. 652.
The mere knowledge of the creditor that the debtor could not pay all his debts unless he could collect all his accounts is not notice of insolvency ; Off v. Hakes, 142 Fed. 364, 73 C. C. A. 464; nor is the mere fact that a debtor is financially embarrassed ; J. W. But
ler Paper Co. v. Goembel, 143 Fed. 295, 74 C. C. A. 433. In the case of a partnership, it must be shown that the firm and the part ners themselves were insolvent when the payments were made ; Tumlin v. Bryan, 165 Fed. 166, 91 C. C. A. 200, 21 L. R. A. (N. S.) 960.
It is reasonable ground to believe that a preference was intended, if the creditor knew facts which would put a prudent man on in quiry and that would have shown that the transfer was preferential in its effect; In re W. W. Mills Co., 162 Fed. 42 ; but where a young woman with no business experience who had her money with a bankrupt firm, of which her uncle was the head, received a check for her deposit in full, with a. state ment that. the firm could no longer use her money ; it was held that she had no reason able cause to believe it a preference; Wright v. Sampter, 152 Fed. 196.
The entry of a judgment and issuing exe cution, under an irrevocable power of attor ney to confess judgment, given by the debtor to the creditor, upon a promissory note dated years before the petition in bankruptcy, may nevertheless be a preference ; Wilson v. Nelson, 183 U. S. 191, 22 Sup. Ct. 74, 46 L. Ed. 147; a' mortgage given within four months of the petition without the mortga gee's knowledge of the mortgagor's insolven cy is not voidable under section 67e ; Coder v. Arts, 213 U. S. 223, 29 Sup. Ct. 436, 53 L. Ed. 772, 16 Ann. Cas. 1008. An attempt to prefer is not necessarily an attempt to de fraud, nor is a preferential transfer always a fraudulent me. The fraud depends upon the motive, and under § 67e, actual fraud must be shown; id. It is a preference for a creditor to procure a purchaser for the bankrupt stock and business where such pur chaser assumes the bankrupt's indebtedness to such creditor ; Off v. Hakes, 142 Fed. 364, 73 C. C. A. 464.
Payments by a merchant in the usual course of business on a running account and new sales succeeding payments, to the net benefit of the estate, and the seller having no reason to believe an intention to prefer, are not preferences ; Jaquith v. Alden, 189 U. S. 78, 23 Sup. Ct. 649, 47 L. Ed. 717; so of a creditor who had a claim on open account, and who had no knowledge of the debtor's insolvency ; Wild & Co. v. Trust Co., 214 U. S. 292, 29 Sup. Ct. 619, 53 L. Ed. 1003. A bona fide transfer of securities to secure a loan to one who immediately thereafter be came•bankrupt is not an illegal preference if the vender had no knowledge of an inten tion to prefer, even though he knew the mon ey was to be used to pay debts; Van Ider stine v. Discount Co., 227 U. S. 575, 33 Sup. Ct. 343, 57 L. Ed. 652.
A bank doing business with a customer who becomes insolvent may accept his money if it has no reasonable cause to believe that a preference will be given ; Studley v. Bank, 229 U. S. 523, 33 Sup. Ct. 806, 57 L. Ed. 1313. A bank, not a creditor, loaned money on mortgage to an insolvent corporation; the money was used to pay debts ; it was not a preference ;, Grinstead v. Trust Co., 190 Fed. 546, 111 C. C. A. 398.
A customer has such interest in securities carried for him by a broker that a delivery to him after insolvency is not necessarily a preference; Sexton v. Kessler, 225 U. S. 90, 32 Sup. Ct. 657, 56 L. Ed. 995. A broker, if he uses securities belonging to his customer, is bound to use his own funds to replace them with others of the same kind, and in so doing he does not deplete his estate against his other creditors ; Gorman v. Lit tlefield, ,229 U. S. 19, 33 Sup. Ct. 690, 57 L. Ed. 1047. A broker paying excess margins to a customer held, in the circumstances, not giving a preference ; Richardson v. Shaw, 209 U. S. 365, 28 Sup. Ct. 512, 52 L. Ed. 835, 14 Ann. Cas. 981.
See BANKRUPT LAWS.