Wilson Brothers v. Cassius B. Nelson

Background

A Wisconsin merchant, Cassius B. Nelson, owed money on a promissory note to Sarah Johnstone. The note included an irrevocable power allowing judgment to be confessed against him. When Nelson was insolvent, Johnstone caused judgment to be entered, execution to be levied, and his stock sold at auction in December 1898. Creditors then filed an involuntary bankruptcy petition, and federal courts asked whether Nelson’s failure to vacate the judgment or file a voluntary bankruptcy petition before the sale was an "act of bankruptcy" under the 1898 law.

Reasoning

The Court addressed whether the 1898 Bankrupt Act treats the result obtained by a creditor as controlling, rather than the debtor’s intent. The majority concluded that the statute’s language makes it an act of bankruptcy when, while insolvent, a person "suffered or permitted" a creditor to obtain a legal preference by judgment and did not vacate that preference at least five days before a sale. Because the power of attorney was irrevocable and remained effective, the Court held Nelson had effectively permitted the judgment and failed to discharge the preference, so his inaction met the statute’s test.

Real world impact

The decision interprets the national bankrupt law to make certain confessed judgments and levies the functional equivalent of preferences that can trigger bankruptcy consequences. Insolvent debtors who hold irrevocable confessed-judgment security face pressure to vacate such preferences or file bankruptcy promptly. Creditors with valid confessed-judgment powers may obtain priority that the bankrupt court can later dissolve if adjudication occurs.

Dissents or concurrances

A dissent argued prior cases required a voluntary act or fraudulent intent by the debtor and that mere failure to file bankruptcy should not be treated as an act of bankruptcy. It stresses longstanding rules protecting ordinary security transactions.