In the case of Phelps v. United States in 1974, the Supreme Court was tasked with determining whether a bankruptcy trustee could recover payments made by an insolvent debtor to a creditor within four months of filing for bankruptcy under Section 60(a) and (b) of the Bankruptcy Act. The court held that such recovery is possible if it can be established that at the time when these payments were made, both parties had reasonable cause to believe that insolvency existed. This decision clarified how "reasonable cause" should be interpreted - not as actual knowledge but rather as grounds for forming a belief or suspicion about insolvency based on available facts. Therefore, even though there may not have been explicit awareness about impending bankruptcy during transactions between debtors and creditors, if circumstances suggested potential financial instability leading towards insolvency then any payment received by creditors could potentially be reclaimed.

In the dissenting opinion for Phelps v. United States, Justice Douglas argued that the majority's decision was a departure from previous interpretations of bankruptcy law and could potentially harm small businesses. He contended that allowing tax penalties to be discharged in bankruptcy would not significantly impact government revenues but would provide much-needed relief to struggling business owners. Furthermore, he criticized the majority's reliance on English common law precedents, arguing that these were irrelevant due to significant differences between American and English bankruptcy laws. Finally, he expressed concern about potential inequities resulting from this ruling; specifically, individuals who had committed fraud or other criminal acts could have their debts discharged while those who simply failed in business endeavors could not.