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said Young and said Waters-Clark Lumber Company as legal and valid, and elected to look to and hold the said WatersClark Lumber Company, instead of this defendant, as liable to said trustee for all sums of money which the said plaintiff may be entitled to recover on account of the transactions mentioned in plaintiff's complaint."

Questions were submitted to the jury covering the issues in the case, except the value of the property, which, by stipulation of parties, was reserved for the court. The jury in response to the questions found that at all the days mentioned in the complaint the property transferred at a fair valuation was insufficient to pay Young's debts; that the lumber company, acting for the bank and pursuant to the arrangement between it and the bank, took the legal title. to the lumber and logs for the benefit of the bank under an agreement with it and Young to account to the bank for a portion of the proceeds; that it was the intention of Young, by the execution of the mortgages and the transfer of the property, to give the bank a preference, and that the bank and officers and agents had reasonable cause to believe that Young intended to give it such preference and to enable it to obtain a greater percentage of its indebtedness than any other of his creditors of the same class would be able to obtain.

The court found that the lumber which was included in the bank's mortgage was worth $3,452.85, and that a note for that sum and value was given by the lumber company to Young and by him transferred to the bank; that the Cadott logs, included in the mortgage and sold by Young to the lumber company, were worth $10,077.84; that the up-river logs not included in the mortgage, but sold to the lumber. company by Young, were worth $11,055.84, and that a note which was given as the net proceeds of the sale of both quantities of logs over and above certain labor liens was worth $2,508.14. This note was given by the lumber company to Young and transferred by him to the bank. The trustee contended in the trial court that he was entitled to recover

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for the entire value of the logs and lumber, and that no credit should be allowed the bank for the sums paid by it to discharge certain liens on the property for labor claims and unpaid purchase money. The court rejected the contentions and gave judgment for the trustee in the sum of $6,254.99. In this sum was included the value of the notes.

The assignments of error are that the Supreme Court erred in the following particulars: (1) In determining that the complaint stated a cause of action. (2) In determining that the bank was liable for the value of the logs and lumber to the extent of the chattel mortgage interest of the bank therein. (3) In determining that the bank was liable for having re-. ceived a preference contrary to sections 60a and 60b of the bankrupt act of July 1, 1898, as "a portion of its chattel mortgage interest in said logs, the sum of $1,335.62 as the proceeds of the sale of the portion of said logs known as the 'up-river logs,' on which logs said defendant never held any chattel mortgage and which logs were never transferred to said defendant." (4) In determining that the bank was liable for the value and moneys it received as a preference, although the trustee had not elected to avoid such preference by bringing suit to recover the same and had not elected to avoid such preference in any manner. (5) And in holding that in determining a question of preference it was immaterial under the bankrupt act whether the bank and the other creditors were of the same class, and in refusing to reverse the judgment because of the error of the Circuit Court in charging the jury that all of the creditors were of the same class. (6) In its construction of the bankrupt act in the following particulars: (a) In holding that a transfer made within four months of the bankruptcy proceedings, which enabled a creditor to obtain any portion of his debt, constituted a preference. (b) That, although the effect of the transfer in question did not operate to give the bank a greater percentage of its debt than other creditors of the same class, such transfer constituted a preference. (c) In determining,

Argument for Plaintiff in Error.

204 U. S.

by such rules of construction of the bankrupt act, that the evidence was sufficient to establish that the bank had reasonable cause to believe that a preference was intended. (7), (8), (9) In holding that the bank was liable for the full value of the preference received in an amount in excess of what was necessary to pay all the other creditors of the bankrupt, and claims of fictitious creditors and claims of creditors who had themselves received preference, and in not limiting the recovery to such sum as would be sufficient to pay the claims of creditors whose claims were provable. (10), (11) In affirming the judgment against the bank and not rendering judgment for it.

Mr. James Wickham, with whom Mr. Burr W. Jones and Mr. Frank R. Farr were on the brief, for plaintiff in error:

The questions raised by the specification of errors are all Federal questions, involving the construction of the Federal bankrupt act. Most of the questions are shown by the opinion of the state Supreme Court to have been there raised and to have been decided adversely to the plaintiff in error, and the other questions not expressly mentioned in the opinion are shown by the certificate of the Chief Justice of the state Supreme Court to have been specially set up and raised and decided adversely to the plaintiff in error. Substantially all of the questions that were involved in the bank's appeal to the state Supreme Court are the same questions that are now involved on this writ of error.

In such a case this court has jurisdiction on a writ of error issued to review the judgment of a state court. Factors & Traders Insurance Co. v. Murphy, 111 U. S. 738; Traer v. Clews, 115 U. S. 528; Dimock v. Revere Copper Co., 117 U. S. 559; Palmer v. Hussey, 119 U. S. 96; Winchester v. Heiskell, 119 U. S. 450; Williams v. Heard, 140 U. S. 529; Dushane v. Beall, 161 U. S. 513; McCormick v. Market National Bank, 165 U. S. 538; Farmers & Merchants Ins. Co. v. Dobney, 189 U. S. 301; Crawford v. Burke, 195 U. S. 176; Kaúfman v.

204 U.S.

Argument for Plaintiff in Error.

Tredway, 195 U. S. 271; Thompson v. Fairbanks, 196 U. S. 516; Humphrey v. Tatman, 198 U. S. 91.

The trustee has not elected to avoid, or brought suit to recover, any preference that the bank may have received, and the judgment rendered therefor cannot be sustained.

A transaction resulting in a voidable preference does not violate any law. The transaction is lawful when made subject to a possibility of being defeated by subsequent events. It continues to be lawful unless it is followed by an adjudication in bankruptcy within the statutory period. It continues to be lawful after that time unless the trustee elects to avoid it. A preference is never void, but only voidable, and no one but the trustee can elect to avoid it. Dyer v. Kratzenstein, 92 N. Y. S. 1012; Lewis v. First National Bank, 78 Pac. Rep. 990.

A creditor by merely receiving the voidable preference does not violate any legal or moral right. Swarts v. Fourth National Bank, 117 Fed. Rep. 1, 11; Swarts v. Frank, 82 S. W. Rep. 60.

A creditor receiving a preference not voidable is given the right of election by section 57g either to return what he received and file his claim with the other creditors, or else keep what he has received and not file his claim. Pirie v. Chicago Title & Trust Co., 182 U. S. 438.

Where the facts are in dispute as to whether or not a certain transaction constitutes a preference, the creditor receiving the alleged preference is by the bankrupt act necessarily called upon to determine for himself whether he will return what he has received and file his claim with other creditors, or whether he shall litigate that question and attempt to hold what he has received, in which event, in most cases, as in the case at bar, the year allowed by $57n in which to file claims would expire without his claim being filed.

The bankrupt act contemplates that the trustee shall exercise his election as to whether or not he shall avoid a preference, and it also contemplates that the creditor receiving VOL. CCIV-34

Argument for Defendant in Error.

204 U.S.

such alleged preference must exercise an election as to what course he shall take. Until the trustee exercises his election, no cause of action accrues. The creditor is not called upon to elect what course he shall take until the trustee has acted. It therefore follows that the trustee should exercise his election and make his demand before commencing suit.

A complaint in such a case is insufficient where it fails to allege such demand and refusal. Shuman v. Fleckenstein, Fed. Cas. No., 12,826; Brooks v. McCracken, Fed. Cas. No., 1932; Lyon v. Clark, 88 N. W. Rep. (Mich.) 1046; Wright v. Skinner, 136 Fed. Rep. 694; Capital National Bank v. Wilkerson, 72 N. E. Rep. (Ind.) 247.

No fraud in the transactions was either proven or found by the court or jury. Except in cases of fraud, and except as to the right to recover a preference, the trustees take the property of the bankrupt in the same plight and condition that the bankrupt himself held it, and subject to all the equities imposed upon it in the hands of the bankrupt. Thompson v. Fairbanks, 196 U. S. 516, 526; York Manufacturing Co. v. Cassell, 201 U. S. 344, 352, and cases there cited; Bankrupt Act, § 60b.

A payment to a creditor who is entitled to priority by reason of having a claim for wages, or by reason of his having some claim placing him in a different class from other creditors, does not constitute a preference. If other creditors are in a subsequent class they are not injured by the transfer, and therefore the enforcement of the transfer does not enable the creditor receiving it to recover a greater percentage of his debt than he is entitled to. Loveland on Bankruptcy, 2d ed. 587; Collier on Bankruptcy, 4th ed. 422; In re Henry C. King Co., 113 Fed. Rep. 110; Doyle v. Milwaukee National Bank, 116 Fed. Rep. 295; Easton v. Garrison, 82 S. W. Rep. (Tex.) 800.

Mr. C. T. Bundy, with whom Mr. R. P. Wilcox was on the brief, for defendant in error:

It was immaterial how the preference was given. If through

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