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Keywords

contractdefendantlitigationtrustbankruptcyrescission

contractdefendantstatutewillbankruptcyrescission

Related Cases

Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873

Facts

The litigation arose from the fraudulent financial activities of Charles Ponzi, who, starting in December 1919, borrowed money under false pretenses, claiming to invest in international postal coupons. By July 1, 1920, Ponzi was taking in about $1,000,000 a week, but ceased selling notes on July 26 due to an investigation. The defendants made payments to Ponzi between July 20 and July 24, shortly before a public announcement of his insolvency. The payments were made in the context of Ponzi's ongoing fraudulent scheme, and the defendants sought to recover their money after the bankruptcy filing.

The defendants made payments to Ponzi as follows: $ 600, 600, 1,000, 1,600, 600, 500, 1,000. By July 1st, Ponzi was taking in about $1,000,000 a week. Because of an investigation by public authority, Ponzi ceased selling notes on July 26th, but offered and continued to pay all unmatured notes for the amount originally paid in, and all matured notes which had run 45 days, in full.

Issue

Did the payments made by the defendants to Ponzi constitute unlawful preferences under the Bankruptcy Act, or were they valid rescissions of their contracts due to fraud?

Rule

Under section 60b of the Bankruptcy Act, a preference can be avoided if the beneficiary had reasonable cause to believe that the payment would enable them to obtain a greater percentage of their debt than other creditors of the same class.

The statute (section 60b of the Bankruptcy Act, as amended by Act June 25, 1910, c. 412, 36 St. 838, 842 [Comp. St. § 9644]), requires that, in order that a preference should be avoided, its beneficiary must have reasonable cause to believe that the payment to him will effect a preference; that is, that the effect of the payment will be to enable him to obtain a greater percentage of his debt than others of the creditors of the insolvent of the same class.

Analysis

The court found that the defendants, despite claiming rescission due to fraud, were aware of Ponzi's insolvency when they received their payments. The evidence indicated that they were seeking to secure their investments in a manner that violated the Bankruptcy Act's provisions against preferences. The court emphasized that the defendants could not trace their payments back to Ponzi's account, which further supported the conclusion that their actions constituted unlawful preferences.

Thus they came into the teeth of the Bankruptcy Act, and their preferences in payment are avoided by it.

Conclusion

The Supreme Court reversed the lower courts' decisions, ruling that the payments made by the defendants were unlawful preferences and could not be returned to them.

The decrees are reversed.

Who won?

Cunningham, as the trustee in bankruptcy, prevailed because the Supreme Court found that the payments made by the defendants were unlawful preferences under the Bankruptcy Act.

The Supreme Court reversed the lower courts' decisions, ruling that the payments made by the defendants were unlawful preferences and could not be returned to them.

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