on the part of Armstrong to hinder, delay, or defraud any of his creditors. He honestly owed the entire debt he secured. He owed a banker, who for years had loaned him money whenever he desired it, without security. A part of his debt was due, and a portion had not yet matured. His creditor was ill, and his sons feared for his life. He owed him more than the entire capital of his bank, and the cashier feared that if this fact were known it might cause a run upon the institution. He was requested to protect and secure an obligation he could not immediately pay. He did so with no apparent purpose or intention except to honestly secure the payment of that which he undoubtedly would have paid as he had promised if the money to do so had been at his disposal. His act was free from fraud or unlawful intent, and the finding of the court upon this question must be affirmed.

3. Was the mortgage voidable by the trustee although the mortgagee did not have reasonable cause to believe that there was an intention to give a preference thereby under section 60b and although the mortgagor had no intent or purpose on his part to hinder, delay or defraud his creditors, or any of them, under section 67e, because the mortgage was given to secure a pre-existing debt within four months of the filing of a petition in bankruptcy? Counsel for the trustee argue that an affirmative answer should be given to this question because sections 60a and 60b have no application to liens voluntarily created, and section 67e avoids mortgages for a pre-existing debt although the mortgagor had no intent to hinder, delay, or defraud his creditors. The portions of these sections pertinent to their argument

are:

"Sec. 60. Preferred Creditors.-a. A person shall be deemed to have given a preference if, being insolvent, he has procured, or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.

"b. If a bankrupt shall have given a preference within four months before the filing of a petition, or after the filing of the petition and before the adjudication, and the person receiving it or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee and he may recover the property or its value from such person."

"Sec. 67. Liens. d. Liens given or accepted in good faith and not in contemplation of, or in fraud upon this act and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by this act.

"e. That all conveyances, transfers, assignments or incumbrances of his property, or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this act subsequent to the passage of this act, and within four months of the filing of the petition, with the intent and purpose on his part to hinder, delay or defraud his creditors. or any of them, shall be null and void as against the creditors of such debtor."

The following, and many other authorities cited by counsel to sustain their contention, have been examined by the court: City National Bank v. Bruce, 109 Fed. 69, 48 C. C. A. 236; In re Sanderlin (D. C.) 109 Fed. 857; In re Jones (D. C.) 118 Fed. 673; In re Belding (D. C.) 116 Fed. 1016; In re Wolf (D. C.) 98 Fed. 84; In re

Pease (D. C.) 129 Fed. 447, 448; In re Gutwillig, 92 Fed. 337, 34 C. C. A. 377; Keppel v. Tiffin Savings Bank, 197 U. S. 356, 25 Sup. Ct. 443, 49 L. Ed. 790; Pollock v. Jones, 124 Fed. 163, 61 C. C. A. 557. But the word "transfer" in section 60a both by the express terms of the bankruptcy law and by authoritative decision includes "the sale and every other and different mode of disposing of, or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift or security." Section 1, par. 25; Pirie v. Chicago Title & Trust Co., 182 U. S. 438, 444, 21 Sup. Ct. 906, 45 L. Ed. 1171; In re Ed. W. Wright Lumber Co. (D. C.) 114 Fed. 1011, 1013. A mortgage is a security and a transfer, and subject to the provisions of section 60a and section 60b. Such a mortgage or transfer as constitutes a preference under section 60a is not voidable under section 60b by the plain words of that section, and by its adjudicated construction unless the creditor who receives it, or is benefited by it, or his agent, has reasonable cause to believe that it was intended thereby to give a preference. Pirie v. Chicago Title & Trust Co., 182 U. S. 438, 446, 21 Sup. Ct. 906, 45 L. Ed. 1171; McNair . McIntyre, 113 Fed. 113, 114, 51 C. C. A. 89, 90; Hussey v. Richardson-Roberts Dry Goods Co. (C. C. A.) 148 Fed. 598, 599; Pittsburgh Plate Glass Co. v. Edwards (C. C. A.) 148 Fed. 377.

And finally, mortgages or transfers, to secure pre-existing debts made within four months of the filing of a petition in bankruptcy, are legal and valid, unless voidable by reason of some provision of the bankruptcy law, or of some state law, notwithstanding the fact that they create preferences. They are valid unless avoided; not void unless validated. The provision of section 67d, that liens for present considerations given and accepted in good faith shall not be affected by the bankruptcy law, does not strike down or render voidable those given and accepted for past considerations, and section 67e, which declares that all transfers made or given by a person adjudged a bankrupt within four months before the filing of the petition "with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void," is necessarily limited by the force of its terms to those transfers which are given with that intent only, and it leaves those given and accepted without such an intent unaffected by it and valid. A transfer or mortgage made by a person adjudged a bankrupt to secure a preexisting debt within four months of the filing of the petition is not voidable under section 67e, unless it was either made with the intent on his part to hinder, delay or defraud his creditors, or some of them, or is held void as against his creditors by the laws of the state, territory, or district in which the property is situated. The result is that the mortgage to Arts was properly sustained by the court below.

The lands described in this mortgage were sold by the trustee free of incumbrances for $135,000, and the collection of the proceeds was completed on March 1, 1906. Out of these proceeds the court below allowed to the mortgagee the principal of his debt and interest thereon until August 26, 1904, the date on which he filed his claim. He has appealed from the decree, and has also filed a petition to re

vise it because interest was not allowed to him until March 1, 1906, the date when the proceeds of the sale had been collected. As no issue of fact is presented, and the only question here is one of law, it will be considered upon the petition to revise, and the appeal will be dismissed. By the terms of the note and mortgage the mortgagor agreed to pay interest on his debt until it was paid, and that the mortgaged lands might be sold by the mortgagee, and that their proceeds might be applied to the payment of this debt and interest. The covenant for the sale and the application of the proceeds of these lands to the payment of the debt and interest was valid and binding, and it ran with the land, so that when the latter came to the hands of the trustee it was mortgaged for the payment of the interest as much as for the payment of the principal, and the proceeds of its sale necessarily came to his possession subject to the same charge. Another rule might prevail if the proceeds of the mortgaged property were insufficient to pay the mortgage debt and its interest in full and the mortgagee was seeking to collect an unpaid balance by sharing with other creditors in the distribution of the common property. He might not be entitled, then, to recover from the proceeds of the common property interest upon his debt to any later date than the unsecured creditors would recover interest upon their claims. But the proceeds of these mortgaged lands appear to be ample to pay the principal and interest of the debt to the mortgagee Arts, and where a trustee sells mortgaged property of the bankrupt's estate free of the mortgage, and the proceeds of the sale are sufficient for that purpose, the mortgagee is entitled to payment of the interest upon his mortgage debt as well as the principal, out of the proceeds in accordance with the terms of the note and mortgage. Thompson v. Fairbanks, 196 U. S. 516, 526, 25 Sup. Ct. 306, 49 L. Ed. 577; York Mig. Co. v. Cassell, 201 U. S. 344, 352, 26 Sup. Ct. 481, 50 L. Ed. 782; In re Devore, Fed. Cas. No. 3847; In re J. H. Alison Lumber Co. (D. C.) 137 Fed. 643, 649.

The decree below must be revised and modified, so that the portion which directs the payment of $97,497.40 to Arts out of the proceeds of the sale of the property mortgaged to him will read:

"It is further ordered, adjudged, and decreed that said claims of William Arts on account of said four notes, including the principal and the interest thereon to March 1, 1906, aggregate $109,107.56, and that this amount be paid in full to said William Arts, the claimant, by the trustee, out of the funds and moneys in his hands which he received on account of the sale of the lands covered by the mortgage to Arts hereinbefore described, after payment of all prior liens and claims thereon as determined by the District Court."

Arts may recover his costs in this court against the trustee upon the latter's appeal, and upon the petition of Arts to revise in matter of law. The appeal of Arts, and the petition of the trustee to revise in matter of law, must be dismissed, and the case must be remanded to the court below, with instructions to modify the decree as indicated in this opinion; and it is so ordered.

CODER v. MCPHERSON.

In re CODER.

(Circuit Court of Appeals, Eighth Circuit. April 3, 1907.)

Nos. 2,453, 66.

1. BANKRUPTCY-INVOLUNTARY PROCEEDINGS-GROUNDS-PREFERENCE FER OF PROPERTY.

A debtor stated to his creditor on December 24, 1903, that his property was worth $246.750, and that he owed only $36,000. On May 2, 1904, he made a mortgage on a part of his property for $98,503.32 to another creditor. On June 13, 1904, he made another statement to his creditor that his property was worth $254,740, and that he owed $195,400, of which $147,500 was secured by mortgages upon his real estate. Thereupon, the creditor to secure its claim for $22,000, took from him three mortgages which together covered substantially all the debtor's unexempt property except a few hogs and horses, including his tools, machinery, and crops, and the debtor, who was then insolvent, thereby gave a preference under section 60a of the bankruptcy law, Act July 1, 1898, c. 541, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445]. Held, the creditor had reasonable cause to believe when it took the mortgages that it was intended thereby to give a preference.

2. NOTICE-CONSTRUCTIVE NOTICE-FACTS PUTTING ON INQUIRY.

Notice of facts which would incite a person of reasonable prudence to an inquiry under similar circumstances is notice of all the facts which a reasonably diligent inquiry would develop.

[Ed. Note. For cases in point, see Cent. Dig. vol. 37, Notice, §§ 4, 6.] (Syllabus by the Court.)

Appeal from the District Court of the United States for the Southern District of Iowa.

On Petition for Review.

Myron L. Learned (John L. Kennedy and George W. Paine, on the brief), for Coder.

T. J. Mahoney (John N. Baldwin and George S. Wright, on the brief), for McPherson.

Before SANBORN, HOOK, and ADAMS, Circuit Judges.

SANBORN, Circuit Judge. On June 6, 1904, Alexander Armstrong who was engaged principally in farming, made a note for $22,000, payable to G. W. Wattles, who was the president of the Union National Bank of Omaha. On June 13, 1904, Armstrong gave to Wattles three mortgages-one on 2,440 acres of land in Carroll county, Iowa, one on 616 acres of land in Monona county, Iowa, and a chattel mortgage on his crops, farm implements, and machinery-to secure the payment of this note. At the same time, and for the same purpose, he made an assignment of his claims against one of his sons which amounted to $27,000, but which were probably of little value. Wattles took and held this note and these securities for the bank. On July 27, 1904, Armstrong filed a voluntary petition in bankruptcy and was subsequently adjudged a bankrupt. The consideration of the note for $22,000 was an indebtedness for about that amount which Armstrong owed to the bank upon his promissory notes which were not then due. About July 15, 1901, Wattles indorsed and delivered.

this note for $22,000 to Thomas B. McPherson, and in October of that year McPherson presented a claim upon this note to the referee in bankruptcy and asked that the mortgages which secured it be sustained and enforced and that his claim be paid in full out of the proceeds of the mortgaged property in preference to those of unsecured creditors. The court below rendered a decree to that effect which the trustee challenges here by an appeal and by a petition to revise. As the question at issue involves a consideration of the facts disclosed by the evidence, the case will be considered upon the appeal and the petition to revise is dismissed.

After McPherson had presented his claim, he turned the note back to the bank in the summer or fall of 1905, and counsel concede that he stood in the shoes of that corporation, so that the only question remaining to be determined in this case is, did the bank have reasonable cause to believe when the mortgages were taken for its benefit on June 13, 1904, that it was intended thereby to give it a preference under section 60b of the bankruptcy law? Act July 1, 1898, 30 Stat. c. 541, p. 562 [U. S. Comp. St. 1901, p. 3445]; Act Feb. 5, 1903, 32 Stat. c. 487, § 13, p. 799 [U. S. Comp. St. Supp. 1905, p. 689].

Armstrong was the owner of the property described in the three mortgages, of some horses and hogs and of a homestead upon which he lived in the town of Glidden in Carroll county, Iowa. He was reputed to be one of the wealthiest men in his county, and, prior to May, 1904, his credit was unquestioned. Wattles had known him for more than 20 years, but had not been so intimately acquainted with him during the 12 years just preceding 1904 as he had been for eight years before that time. The bank had purchased in the year 1903 one of Armstrong's notes for about $5,000, and when, in December of that year, this note became due, Armstrong went to the bank and sought to renew it or to borrow money to pay it. Wattles asked him for a financial statement, and he made one in which he briefly described his property, estimated its value to be $246,750 and stated that he owed in all $36,000. In reliance upon this declaration the bank loaned him about $22,000 between December 23, 1903 and June 2, 1904. On May 2, 1904, Armstrong made a mortgage on 2,360 acres of his land in Carroll county to secure a debt of $98,503.32 which he owed to William Arts, and this mortgage was recorded on May 3, 1904. During the last days of May or the first days of June of that year Wattles, and Thomas the cashier of the bank, became aware of this mortgage, and on June 6, 1904, Thomas asked Armstrong, who appeared at the bank, for security for the debt he owed to the bank, and he promised to give it and signed the note for $22,000. He neglected to give any security for about a week and then Thomas went to Glidden and obtained the three mortgages on June 13, 1904. At the time these mortgages were made Armstrong told Thomas that he did not owe Arts more than $70,000 and he made another financial statement in which he estimated the value of his property at $254,740, and the amount of his debts at $195,400, thereby showing the value of his property to be $59,340 more than the aggregate amount of his debts. According to this declaration