Sargent v. Blake

• Decision Date: 19 March 1908
• Docket Number: 2,623.
• Parties: SARGENT v. BLAKE.
• Court: U.S. Court of Appeals — Eighth Circuit

160 F. 57

SARGENT v. BLAKE.

No. 2,623.

United States Court of Appeals, Eighth Circuit.

March 19, 1908

[Copyrighted Material Omitted]

Willard P. Hall (A. E. Spencer, on the brief), for appellant.

Edwin A. Krauthoff (Arthur Miller, Samuel Feller, and Karnes & New on the brief), for appellee.

Before SANBORN, HOOK, and ADAMS, Circuit Judges.

SANBORN Circuit Judge.

In December, 1902, King and Maxwell formed a partnership in the business of dealing in paints, oils, glass, and other articles at Kansas City, in the state of Missouri, under the name of King & Maxwell Paint & Glass Company, and Maxwell borrowed $3,500 of his mother, Mrs. Sargent, to put into the business, and gave her his promissory note for the money payable with interest in three years from the date of the note. He paid the interest on it from time to time until on June 11, 1904, he paid her $2,500 of it, and on June 14 1904, $1,231.90, the amount still owing upon it, and she surrendered the note to him. During the year 1903 and the first half of the year 1904 the company made a profit, or the partners thought it made a profit, of $3,800. Between February 1, 1904, and June 18, 1904, $9,096.08 which was derived from the sales of merchandise by the partnership was deposited in the banks to the credit of the company, and prior to June 11, 1904, all this money, except $3,731.90 subsequently paid to Mrs. Sargent and $867.60 paid for merchandise bought, was drawn out of the bank by the partners as individuals. On June 11, 1904, or a day or two before that day, Maxwell learned that King, who had the financial management, had drawn out all the money that he had put into the firm as capital and his half of the profits, which amounted to about $4,400 in all, with the exception of $234.34. Maxwell was dissatisfied with King's action, and upon consultation they agreed that in consideration of $234.34 paid to him out of the moneys of the company, and of Maxwell's covenant to assume and pay all the firm debts, King should sell and convey his interest in the property of the company and in the business to Maxwell, should authorize Maxwell to carry on the business in the name of the company, and should agree to keep out of any like business for a year. On June 11, 1904, the $234.34 was paid to King, and he executed and delivered to Maxwell a formal bill of sale, in which the terms just stated were clearly embodied, and delivered to him the exclusive possession of the property and business of the company. At this time the partnership and each of the partners was insolvent, its liabilities were probably about $25,000 and its assets about $15,000, but each of the partners testified that he did not know or think at that time that the firm was insolvent. After Maxwell had purchased the interest of his partner in the firm property and business, and had received his bill of sale and exclusive possession and control of the property, and on the same day, he bought a draft for $2,500 with a check which he drew in the name of the company upon the moneys that had been theretofore deposited to its credit in a bank, and he sent this draft to his mother in part payment of his note.

On June 14, 1904, he bought in the same way and sent to her another draft for $1,231.90, the balance then owing on the note she held, and she surrendered it to him paid. King testified that he never consented to the application of the partnership funds to the payment of the individual debt of Maxwell to his mother. Mrs. Sargent did not have reasonable cause to believe that it was intended by this payment to give her a preference over any other creditor of Maxwell or of the partnership. She did not know, believe, or have reasonable cause to believe that these payments were made with the intent on the part of Maxwell to hinder, delay, or defraud any of his creditors or any of the creditors of the company, or that they were made out of the funds or property of the partnership. On June 23, 1904, a petition in bankruptcy was filed, and on August 1, 1904, the partnership and the individuals King and Maxwell were adjudged bankrupts. The evidence at the final hearing in this suit disclosed no facts material to the questions before this court which have not now been stated. Upon these facts the court below rendered a decree that the amounts paid to Mrs. Sargent belonged to the estate of the partnership, 'the partnership firm,' in the words of the decree, 'at the time of said payments by said James E. Maxwell to the defendant Laura A. Sargent, being insolvent, and the same having been so paid to the defendant in fraud of the equitable preferential right thereto of the partnership creditors of said partners' and that she should pay them back to the trustee of that estate with interest. Mrs. Sargent appealed from this decree.

This suit was instituted by the exhibition in the court below of a bill in equity against Mrs. Sargent alone, in which the trustee set forth two inconsistent causes of action, first, that Maxwell paid Mrs. Sargent $3,731.90 out of the funds of the partnership with intent to hinder, delay, or defraud its creditors at a time when it was insolvent and did not owe her anything, and that Mrs. Sargent knew this at the time she received the payment; second, that Maxwell paid her this $3,731.90 with intent to prefer her over his other creditors of the same class, that the payment did thus prefer her, and that Mrs. Sargent had reasonable cause to believe that the payment was intended to give such a preference. The proof was that the bill of sale from King to Maxwell had been made and delivered so that it had made all the debts of the company his individual debts by his assumption of them, and all its property his individual property before he paid Mrs. Sargent, and that she had no cause to believe and did not believe that any preference was intended, nor that the payment was made to hinder or defraud any creditor. The result was that at the close of the evidence the first cause of action upon the face of the transaction failed, because the payment was not made out of the funds of the partnership, and the second failed, because Mrs. Sargent had no cause to believe that a preference was intended by the payment. Bankruptcy Law of July 1, 1898, c. 541, 30 Stat. 562, Sec. 60b (U.S. Comp. St. 1901, p. 3418, Sec. 60b).

In order to escape from this conclusion counsel for the trustee invoke the provision of section 5f of the bankruptcy law that the net proceeds of the property of the partnership shall be appropriated to the payment of the partnership debts, and the net proceeds of the individual estate of each partner to the payment of his individual debts, and the provisions of section 67e that transfers made by a bankrupt within four months of the filing of the petition against him with the intent on his part to hinder, delay, or defraud his creditors shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration, that unexempt property so transferred shall remain a part of the estate of the bankrupt, and shall pass to his trustee whose duty it shall be to reclaim and recover if for the benefit of the creditors, and they argue that the bill of sale from King to Maxwell to Mrs. Sargent, were void under these sections because their effect was that property of the partnership estate was applied, after the firm and the partners were insolvent, to pay the individual debt of one of the partners.

The only evidence that Maxwell intended to hinder or defraud the creditors of the partnership is that, while the firm and the partners were insolvent, King conveyed his interest to Maxwell, and the latter paid his mother in preference to his other creditors. The only way in which Maxwell could have made this payment in bad faith would have been to have made it in whole or in part in secret trust for himself, or with the actual intent to hinder or defraud the creditors of the company more than the mere payment of the debt to his mother out of the property of the former partnership, in preference to the claims of the partnership creditors, must necessarily have delayed or prevented their collection of their claims, and there was no evidence of any such trust or intent. The evidence was that he intended to pay his mother in preference to the partnership and to other creditors, that his mother had loaned him the money to engage in and conduct the partnership business, that he had purchased the interest of his partner, and that as soon as the business and the property became his he paid her the debt which he owed her.

The facts that the payment to Mrs. Sargent had the inevitable effect to deprive the creditors of the partnership of an opportunity which they would otherwise have had to collect their claims in whole or in part, and that Maxwell knew that this would be its effect, and hence must have intended that result, do not establish the fact that he intended to hinder delay, or defraud those creditors within the meaning of section 67e. It is every intent to hinder, delay, and defraud creditors unlawfully only, not every intent to hinder or delay them in collecting, or to prevent them from collecting, their claims that avails to avoid a transfer under that section. An insolvent debtor has the jus disponendi of his property until the commencement of proceedings in bankruptcy against him. He has the legal right to secure and pay his debts with it provided always the security or the payment is not violative of any of the acts of Congress or of any of the laws of the land. A preference of one creditor over others by such a payment or by such security, which is free from actual or constructive fraud, and from any purpose to affect other creditors injuriously...