Wilson v. Nelson
Headline: Bankruptcy rule expanded: Court holds an insolvent debtor’s irrevocable power letting a creditor enter judgment and levy is a ‘preference’ he ‘suffered or permitted,’ and failing to vacate it was an act of bankruptcy.
Holding: The Court held that an insolvent debtor’s irrevocable power permitting a creditor to enter judgment and levy constituted a preference he ‘suffered or permitted,’ and failing to vacate it five days before sale was an act of bankruptcy.
- Treats judgments from irrevocable confessions as debtor 'suffered' preferences in bankruptcy.
- Allows such judgments and levies to be set aside in bankruptcy as preferential.
- Creates pressure on debtors to vacate preexisting security before forced sales.
Summary
Background
Cassius B. Nelson borrowed money from Sarah Johnstone in 1885 and gave a promissory note with an irrevocable power allowing judgment to be confessed on the note. Interest was paid until November 1, 1898, but Nelson was then insolvent. On November 21, 1898, Johnstone caused judgment to be entered and the sheriff levied and later sold Nelson’s goods. Creditors filed an involuntary bankruptcy petition against Nelson on December 10, 1898.
Reasoning
The Court considered whether allowing a creditor, by legal process, to obtain a lien or judgment while the debtor was insolvent constitutes an act of bankruptcy under the 1898 Bankrupt Act. The majority explained that the 1898 law focuses on the actual result — whether a creditor obtained a preference through legal proceedings — rather than the debtor’s subjective intent. Because the irrevocable power made it possible for judgment and levy to be entered while Nelson was insolvent, the Court concluded he had “suffered or permitted” a preference and, by not vacating it at least five days before the sale, committed an act of bankruptcy.
Real world impact
The decision treats judgments obtained under longstanding, irrevocable confession powers as preferences a debtor has “suffered or permitted” if entered during insolvency, and holds that failing to remove such preferences before sale can qualify as an act of bankruptcy. That outcome can dissolve liens of creditors who obtained judgments shortly before bankruptcy.
Dissents or concurrances
A four-justice dissent argued prior decisions required an affirmative intent by the debtor and that passive nonresistance to lawful collection did not constitute an act of bankruptcy; they would have answered the questions negatively.
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