Kaufman v. Tredway

Background

A man who later went into bankruptcy paid money to his brother, who is the defendant in the case. Four days after that payment, the brother gave the bankrupt $767 when the bankrupt asked for money to pay employees. The bankrupt’s insolvency at the time of the payment and whether the brother reasonably believed the payment was meant to prefer him were decided by a jury and are factual matters the Supreme Court did not review. The state courts applied a stricter rule denying the brother a set-off.

Reasoning

The central legal question was whether paragraph "c" of section 60 allows a creditor to claim a set-off when he in good faith extended unsecured credit and actually handed money or property to the debtor, without proving the funds remained part of the debtor’s estate until bankruptcy. The Court explained that the statute focuses on the new credit that remains unpaid at adjudication, not proof of continued possession. It rejected the state court’s requirement that the creditor show the money was kept in the debtor’s estate or used to pay preferred debts, and emphasized Congress intended protection for honest creditors.

Real world impact

The Court reversed the state court and sent the case back for further proceedings consistent with this interpretation. Practically, a creditor who in good faith gives unsecured money or goods to a debtor and actually parts with them may be able to offset that credit against a trustee’s recovery for a prior preferential payment. Factual issues, like insolvency and the creditor’s belief about preference, remain for the jury. The Court also found no problem with awarding interest from the start of the action. The opinion also guards against dishonest arrangements designed to hide assets after receiving a preference.