Joseph F. Hughes & Co. v. Machen, 5659.

Decision Date22 December 1947
Docket NumberNo. 5659.,5659.
Citation164 F.2d 983
PartiesJOSEPH F. HUGHES & CO. et al. v. MACHEN.
CourtU.S. Court of Appeals — Fourth Circuit

Nathan Patz, of Baltimore, Md., for appellants.

Charles G. Page, of Baltimore, Md. (Frederick J. Singley, of Baltimore, Md., on the brief), for appellee.

Before PARKER, SOPER and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

This is an appeal by two creditors of the bankrupt, Cummins Construction Corporation, from an order of the District Court ratifying a compromise agreement between the trustee in bankruptcy and several creditors of the bankrupt, including guarantors of obligations of the bankrupt.

The bankrupt was engaged in the construction business and during the war performed some work on Government projects. On October 16, 1944, it was indebted to the Baltimore National Bank on three notes in the sum of $70,000, and to the First National Bank of Baltimore on four demand notes in the sum of $125,000. All these notes were guaranteed by Albert S. Cummins, president of the bankrupt, John R. Cummins, vice president, Harold N. Cummins, secretary, and Charles A. Cummins, father of Albert and John Cummins and a stockholder in the bankrupt.

The bankrupt's solvency on October 16, 1944, depended upon the validity of certain claims which it had against the Government for work performed in the construction and installation of certain facilities at Cedar Point, Maryland. It had theretofore listed these claims as assets in its balance sheet, and without them was admittedly insolvent. On the morning of October 16, 1944, the bankrupt was informed that certain difficulties had arisen with respect to these claims and that payment could not be expected in the immediate future. Upon receipt of this information, Albert Cummins, president of the bankrupt, went to the Baltimore National Bank to secure additional funds. The facts were disclosed to an officer of the bank who referred Cummins to the First National Bank, indicating that the Baltimore National Bank would follow its lead. The First National Bank, upon being advised of the doubts surrounding the bankrupt's claims against the Government, called its notes and immediately took over its deposits in the sum of $53,886.29, and credited this amount against the notes. The Baltimore National Bank followed suit with respect to the bankrupt's deposit in the sum of $14,628.76, and applied it against a note of the bankrupt for $25,000 due that day.

Subsequently two other transactions took place which are relevant to the issues raised on this appeal. On December 8, 1944, the guarantors on the outstanding notes entered into an agreement with the banks, the substance of which was that Charles A. Cummins, one of the guarantors, and his wife were to pay to the banks the sum of $86,000, and, in consideration therefor, the banks agreed to release all the guarantors from any further liability on their guarantees. It was further provided that the banks would not reduce their claims against the bankrupt by this amount but that any money recovered by them over and above that to which they were entitled would be refunded to Charles A. Cummins and his wife. This was a proper arrangement for if the banks had reduced their claims by $86,000, this sum could have been claimed from the bankrupt by Charles A. Cummins.

The other transaction arises from a Government contract for construction work at Cedar Point, which in 1942 the bankrupt and Riggs Distler and Company, Inc., as joint venturers, agreed to perform. The Baltimore National Bank advanced funds to be used on this work by the joint venturers who, in return, executed an assignment to the bank of any money due to them under the contract, and gave notice of the assignment to the Government. The assignment was limited so as to secure only advances made by the bank in connection with this project, and in 1944 all the advances had been repaid. The Government, however, had not been notified that the assignment had terminated, and accordingly, on December 6, 1944, the Bank received a check from the Government in the amount of $45,103.73 which represented a payment made under the Cedar Point contract. The bank cashed the check and delivered one-half of the proceeds to Riggs Distler and Company, Inc. but retained the balance, $22,551.86, and credited it against the bankrupt's obligations.

On January 4, 1945, the Company was adjudicated bankrupt upon an involuntary petition filed against it. The trustee in bankruptcy, upon a review of the facts above set out, concluded that the retention by the Baltimore National Bank of one-half of the Government payment was preferential and instituted proceedings to recover this sum. He was also of the opinion, however, that the set-off by the banks of the bankrupt's deposits against its notes were not preferential, either as to the banks or to the guarantors. Certain creditors, including the appellants, disagreed with this view and, with leave of court, brought suit against the guarantors to recover $68,515, the aggregate amount of the deposits. This suit has not yet reached a trial on the merits.

On August 2, 1945, the trustee entered into the compromise agreement with the two banks and the endorsers. The gist of the agreement is that the Baltimore National Bank will pay the trustee the sum of $22,551.86 retained by it from the Cedar Point project check, and, in consideration, both banks and all guarantors will be relieved of any further liability that might be asserted against them on behalf of the bankrupt estate. Twenty-two creditors including the appellants, were opposed to this plan, but the Referee recommended its acceptance. The District Judge modified the plan to provide for the payment of interest by the Baltimore National Bank on the money retained by it and, as modified, approved the compromise. This appeal followed.

The appellants object to confirmation of the plan on the ground that since there is at least a colorable claim against the guarantors which the creditors are willing to prosecute at their own expense, they should be allowed to proceed with their suit. Further, they say that there is no theory of law under which the Baltimore National Bank could be entitled to retain one-half of the Government payment and hence the surrender thereof cannot be considered as consideration for the release of the banks and the guarantors, and, under no hypothesis, as consideration for the release of the First National Bank or of the endorsers, who had no claim of any sort to the money.

The area of discussion will be much reduced if the position of the parties on certain questions, once at issue, but now in effect removed from the field of controversy, is first stated. The trustee in bankruptcy although inclined at first to the opinion that a reasonable argument, based largely upon the breadth of certain provisions in the collateral notes held by the Baltimore National Bank, could be set up in support of the Bank's claim to the proceeds of the Government check, is now satisfied that the claim cannot be sustained. Furthermore, it is not now disputed that on October 16, 1944, when the banks took over the deposits, both they and the endorsers had reasonable ground to believe that the Construction Company was insolvent.

On the other hand, the appellant creditors concede that the banks had the legal right, notwithstanding the company's insolvent condition on that day, to appropriate the deposits, and that by so doing, they did not receive a voidable preference under the bankruptcy statute. All of the testimony tends to prove that the deposits were made in the regular course of business and were not made fraudulently and collusively for the purpose of giving the bank an unlawful preference. During the hearings before the Referee the objecting creditors were pressed by the trustee to produce any evidence in their possession tending to show that the deposits were built up in an abnormal way in order to give the banks an opportunity to credit them upon the notes and thus reduce the debts and the liability of the guarantors; but no such evidence was forthcoming. It was shown during the period prior to October 16, 1944, that the bankrupt deposited in an inactive account in another bank, to which the bankrupt was not indebted, the sum of $26,000. This action may have indicated some doubt on the part of the company as to its solvency, but it obviously had no tendency to show that the deposits in the active accounts were improperly increased. Nothing has been brought to our attention to cast any doubt upon the finding of the Referee, approved by the District Judge, that "the testimony definitely shows that the funds constituting these...

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