statute so requires.161 But in an action to rescind a contract for the sale of land and to recover the land for nonpayment of the purchase price, in which the defendant admitted that more than half the price was unpaid, and was a legal charge on the land, it was held that a judgment for the recovery of the land should not be reversed because the interest provided for in the contract of sale was usurious.162 Following the general rule in regard to illegal contracts, it is held that, after a usurious contract has been fully executed and performed, a court of equity will not interfere in aid of either of the parties (in the absence of a statute authorizing it to do so) by opening up and readjusting the transaction.163

While the laws against usury are ordinarily administered as between a borrower and a lender, there may be other cases in which this form of illegality will so taint a right or claim as to cause it to be rejected by the courts. Thus, in a case in Mississippi, it appeared that a lender of money at extortionate rates of interest and by contracts void as against public policy established a branch or agency and placed the defendant in charge of it. Afterwards the defendant claimed the business as his own and refused to account. It was held that the principal could not maintain a bill to recover money alleged to have been made, and for an injunction and receivership, since he would have to depend for a decree on the illegal contracts and transactions.164

181 Shawmut Commercial Paper Co. v. Brigham, 211 Mass. 72, 97 N. E. 636.

162 Hood v. People's Bldg. & Sav. Ass'n, 8 Tex. Civ. App. 385, 27 S. W. 1046.

163 Chase & Baker Co. v. National Trust & Credit Co. (D. C.) 215 Fed. 633; Irwin v. McKnight, 76 Ga. 669; Fessenden v. Taft, 65 N. H. 39, 17 Atl. 713.

164 Woodson v. Hopkins, 85 Miss. 171, 37 South. 1000, 38 South. 298, 70 L. R. A. 645, 107 Am. St. Rep. 275.

§ 326.

CHAPTER XIV

BANKRUPTCY AND INSOLVENCY

Effect of Bankruptcy on Executory Contracts in General. 327. Bankruptcy as Anticipatory Breach of Contract.

328. Executory and Option Contracts of Sale.

§ 326. Effect of Bankruptcy on Executory Contracts in General. In all cases of ordinary executory contracts, the bankruptcy of one of the contracting parties does not operate to dissolve the contract nor give to the other party the right to rescind it. This privilege may be exercised by the trustee, who has the right to repudiate the contract if he deems it onerous or unprofitable to the estate in his charge. But if he is willing to continue and complete it, the other party cannot withdraw. In an important case on this subject it was said: "An adjudication in bankruptcy does not dissolve or terminate the contractual relations of the bankrupt. Its effect is to transfer to the trustee all the property of the bankrupt except his executory contracts, and to vest in the trustee the option to assume or to renounce these. It is the assignment of the property of the bankrupt to the trustee by operation of law. It neither releases nor absolves the debtor from any of his contracts or obligations, but, like any other assignment of property by an obligor, leaves him bound by his agreements and subject to the liabilities he has incurred. One agrees

*

to pay monthly rents for the place of residence of his family or for his place of business, or to render personal services for monthly compensation for a term of years; he agrees to purchase or to convey property; and then he becomes insolvent and is adjudicated a bankrupt. His obligations and liabilities are neither terminated nor released by the adjudication. He still remains legally bound to pay the rents, to render the services, and to fulfill all his other obligations, notwithstanding the fact that his insolvency

may render him unable immediately to do so. Nor are those who contracted with him absolved from their obligations. If he or his trustee pays the stipulated rents for his place of residence or for his place of business, the lessors may not deny to the payor the use of the premises according to the terms of the lease. If he renders the personal services, he who contracted to pay for them may not deny his liability to discharge this obligation. His trustee does not become liable for his debts, but he does acquire the right to accept and assume or to renounce the executory agreements of the bankrupt, as he may deem most advantageous to the estate he is administering, and the parties to those contracts which he assumes are still liable to perform them. And so, throughout the entire field of contractual obligations, the adjudication in bankruptcy absolves from no agreement, terminates no contract, and discharges no liability." And in another bankruptcy case it was said: "As a legal proposition, insolvency or bankruptcy alone does not, in a contract of this kind, constitute either a breach or authorize its rescission or abandonment, for it may be finally and fully performed by others who may be acting, for instance, as trustee or as successors or purchasers of the bankrupt's property and rights involved therein or affected thereby." Thus, for example, it is doubtful whether a subcontractor is entitled to disaffirm a contract to furnish building material on account of the insolvency of the general contractor, but even if he is so entitled, his failing to repudiate after knowledge of the facts, and his calling on the owner in collecting his money will be held to constitute a ratification. On similar principles,

1

a rescission of a contract to purchase stock, inchoate at the time of the bankruptcy of the corporation, is not binding on creditors of the corporation who become such after the subscription is made and before the proposed rescis

1 Watson v. Merrill, 136 Fed. 359, 69 C. C. A. 185, 69 L. R. A. 719. 2 In re Morgantown Tin Plate Co. (D. C.) 184 Fed. 109, citing Lester v. Webb, 5 Allen (Mass.) 569; Carey v. Nagle, Fed. Cas. No. 2,403; Vandegrift v. Cowles Engineering Co., 161 N. Y. 435, 55 N. E. 941, 48 L. R. A. 685.

3 University of Virginia v. Snyder, 100 Va. 567, 42 S. E. 337.

sion. And the fact that a director of a corporation becomes insolvent or even bankrupt does not vacate his office."

в

But naturally an exception to this general rule must be made in the case of such executory contracts as relate to purely personal services or involve the element of personal trust or confidence. These contracts cannot be assumed by the trustee in bankruptcy, because the other party cannot be compelled to accept him as a substitute for the bankrupt, and if the bankruptcy makes performance by the bankrupt impossible, the other party may terminate or rescind the contract. Thus the bankruptcy of either the principal or the agent, in a contract of agency, operates as a rescission of the contract and terminates the authority of the agent, except in cases of a power coupled with an interest.' And so, the bankruptcy of one partner ipso facto dissolves the partnership, and the trustee in bankruptcy becomes tenant in common with the solvent partner in the joint stock. So, where a note is given as the price of a scholarship in an incorporated academy, and the academy becomes insolvent and ceases to impart instruction, the trustees thereof have power to cancel their promise to teach the promissor's nominee so long as interest was paid on the note, and thereupon to surrender the note. As to the effect of the bankruptcy of an employer on the contract of employment, it is generally held that this event gives the employé the right to consider his contract as dissolved, especially where the employer is a corporation or a partnership, and he may prove a claim for the unpaid balance of his salary to the time of the filing of the petition in bankruptcy, if it was fixed by a valid written contract or other instrument, or otherwise he may claim the reason

In re American Nat. Beverage Co. (D. C.) 193 Fed. 772.

9

5 Atlas Nat. Bank v. F. B. Gardner Co., 8 Biss. 537, Fed. Cas. No. 635.

See, supra, § 208. And see Black, Bankr. § 306.

7 Audenried v. Betteley, 8 Allen (Mass.) 302; Ogden v. Gillingham, Baldw. 38, Fed. Cas. No. 10,456; In re Daniels, 6 Biss. 405, Fed. Cas. No. 3,566.

8 Wilkins v. Davis, 2 Low. 511, Fed. Cas. No. 17,664.

Mary Washington Female College v. McIntosh, 37 Miss. 671.

able value of his services to that time.10 There may also be cases, aside from contracts for personal services, where impossibility of performance arising from bankruptcy will justify the rescission or repudiation of the contract. Thus, it is said that an adjudication that a fire insurance company is insolvent will ipso facto cancel all existing policies on which no loss had previously occurred.11

§ 327. Bankruptcy as Anticipatory Breach of Contract. It was shown in an earlier part of this work that one of the parties to a contract may treat it as annulled or may rescind it when the other has placed himself in a situation where it is impossible for him to perform the uncompleted part of the contract, or has unequivocally stated his intention not to perform.12 And it is held that the bankruptcy of a party is the equivalent of such disablement and repudiation, or may be treated as an anticipatory breach of the contract, so that if the bankrupt, at the time of the bankruptcy, by disenabling himself from performing his part of a particular contract, and by repudiating its obligation, could give to the other party the right to maintain at once a suit in which damages could be assessed at law or in equity, then such other party may prove his claim as a creditor in the bankruptcy proceedings. 13 In regard to the purchase and sale of goods, it is said that, "although the buyer's insolvency does not per se put an end to the contract, yet if the buyer has given notice to the seller of his insolvency, the latter is justified in treating the notice as a declaration of intention to repudiate the contract, and after the lapse of a reasonable time to allow the buyer's trustee to elect to complete the contract by paying the price in cash, the seller may, without tendering the goods to the trustee, consider the contract as broken, and prove against

10 In re Grubbs-Wiley Grocery Co. (D. C.) 96 Fed. 183; Ex parte Pollard, 2 Low. 411, Fed. Cas. No. 11,252; In re B. H. Gladding Co. (D. C.) 120 Fed. 709; In re McCarthy Portable Elevator Co. (D. C.) 196 Fed. 247.

11 Todd v. German-American Ins. Co., 2 Ga. App. 789, 59 S. E. 94. 12 Supra, §§ 203, 207.

18 In re Pettingill (D. C.) 137 Fed. 143; Black, Bankruptcy, § 495.