Continental & Commercial Trust & Sav. Bank v. Chicago Title & Trust Co.

• Citation: 199 F. 704
• Decision Date: 24 June 1912
• Docket Number: 1,894.
• Parties: CONTINENTAL & COMMERCIAL TRUST & SAVINGS BANK v. CHICAGO TITLE & TRUST CO.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

199 F. 704

CONTINENTAL & COMMERCIAL TRUST & SAVINGS BANK v. CHICAGO TITLE & TRUST CO.

No. 1,894.

United States Court of Appeals, Seventh Circuit.

June 24, 1912

This appeal is from a decree of the District Court, confirming the master's report and awarding recovery against the appellant bank, as successor substituted for the Federal Trust & Savings Bank, defendant, under a bill filed by the appellee, as trustee in bankruptcy, charging that the defendant received unlawful preferences from the bankrupt. W P. Anderson & Co. were joined as defendants in the bill; but the District Court entered a dismissal as to them, and no question is raised in respect thereof. The material facts constituting the alleged preference are undisputed, largely embraced in stipulations, and appear as findings of fact in the master's report, from which the following summary is extracted:

(1) The proceedings in bankruptcy against the bankrupt, Earl H Prince, were instituted February 15, 1905. For several years theretofore he was a member of the Board of Trade of Chicago engaged in the buying and selling of commodities subject to the rules of the Board of Trade. During the same period the defendant Federal Trust & Savings Bank was engaged in general banking business in Chicago, and Prince was transacting his banking business with such bank, and had a general deposit and checking account therein up to February 10, 1905.

(2) The rules of the Board of Trade provided for a method of trading between its members in a so-called 'ringing up of trades,' whereby settlements were made through the Board for such transactions. On time contracts it was provided that purchasers shall have the right to require of sellers as security a deposit of 10 per cent. based upon the contract price of the property bought, and further security from time to time as the market advances, and that sellers shall also have the right to require as security from buyers a deposit of 10 per cent. of the contract price of the property sold and in addition any differences that may occur between the estimated value of the property and the price of sale. For these purposes the rules further provided that banks may be authorized to issue margin certificates to be used in such cases and become authorized depositories for securities on giving bonds for the proper disposal of deposits by them, and that banks so authorized be designated as 'Board of Trade Depositories.' The certificates to be issued by the depository in such case were to be made in duplicate and nontransferable for all deposits made with them were to state by whom the deposits are made and for whose account they are held, and that the same are payable upon the return of the certificate or the duplicate thereof duly indorsed by the parties to the contract, or on the order of the president of the Board of Trade. The form of the certificate is prescribed by the rules and the memorandum thereof which shall be kept, and all certificates when issued are required to be placed in the office of the Clearing House of the Board, and all business pertaining to the issuance and use of the said certificates is required to be carried on in accordance with the rules of the Board.

(3) From and after August 20, 1902, the Federal Trust & Savings Bank was a Board of Trade depository. On and prior to February 10, 1905, the bankrupt had a deposit and checking account with the bank, and at the date named was largely indebted to the bank on demand notes and otherwise. On February 10, 1905, the bank 'called the said loans and they were not paid, and thereupon the bank applied as a payment upon the same $3,095 then on deposit in the bankrupt's checking and deposit account in the bank,' thus leaving to the credit of the bankrupt in that account only the sum of $3.25. On the same day the bank agreed with the bankrupt 'that, if he would thereafter make deposits to cover the same, it would pay certain salary and pay roll checks of employes of Prince and checks issued to the Board of Trade Clearing House. ' Pursuant to such agreement the bank did pay such checks issued on several days up to February 14th, amounting to $2,506.46; and Prince deposited with the bank on February 10th, $1,450, on February 11th, $310, and on February 14th two deposits, one for $820 and the other for $499, making a total of his deposits of $3,079; all of these items being entered on the books of the bank under date of February 14, 1905. The amounts thus deposited exceeded the amount of checks paid under the arrangement in the sum of $572.54. This balance, together with the $3.25 remaining to the credit of Prince on February 10th, making the sum of $575.79, was applied by the bank on February 14th as a credit upon the general indebtedness of Prince to the bank. Other checks drawn by Prince on and prior to February 10th, which were not included in the above-mentioned arrangement then made, were subsequently presented to the bank, but payment refused.

(4) At various dates between September 15, 1904, and February 9, 1905, the bank had issued to Prince margin certificates to be used by him in his Board of Trade transactions, which were placed by him in the office of the Clearing House of the Board for various sums, ranging from $250 to $500 in amount, aggregating $4,250. To procure such certificates Prince either gave checks against his checking account or deposited with the bank the requisite sum of money. A record of these margin certificates was kept in the bank in a 'Margin Register,' and the total of each day's margin certificates issued was entered in the ledger of the bank in an account called the 'Margin Account,' and the total of all unpaid margins appeared on the bank's ledger as one of the items constituting its total liabilities.

(5) On February 14, 1905, Mr. Castle, the vice president of the bank, and Mr. Prince, had a conference at the bank in reference to the financial affairs of Prince, and, while together, Mr. Castle telephoned to W. P. Anderson, president and treasurer of W. P. Anderson & Co., to join the conference. On the arrival of Mr. Anderson Mr. Castle informed him that Prince was in financial troubles in quite a number of open trades, and asked Mr. Anderson's advice as to the best way to close them. 'Mr. Anderson suggested that Prince transfer them to some other dealer and close them up in that way. Prince asked Mr. Anderson if his company would take them and he agreed that it would if, after examination, the trades showed a profit. Investigation was made by Mr. Anderson, and he was satisfied with the conditions, and on the same day, February 14th, or the day following, Prince transferred all of his open trades in accordance with the rules of the Board, and Anderson & Co. assumed and agreed to carry out the contracts with the various parties with whom they were made. ' On February 15th the secretary of the Board of Trade, on request of Anderson & Co., notified members having trades with Prince to transfer them to Anderson & Co., and 'that Prince's sheet would clear on that day, as usual, but that rings made for the following day would be closed by Anderson & Co.'

Anderson & Co. thereafter settled the transactions, putting up its own securities in the place of the certificates deposited by Prince, to secure the same, and the Prince certificates were taken up by Anderson & Co. and turned over to the bank on that day. When these certificates were turned over to the bank, Prince was indebted to it in a sum greatly exceeding the amount of the certificates, and the bank thereupon credited the amount thereof, $4,250, on account of such indebtedness.

The finding further states: At the date of these transfers of the open trades of Prince, the condition of the market was such 'that the aggregate sum of the amounts due thereon to Prince from the members of the Board of Trade, if he had then settled the trades, would have been greater than the aggregate sums of the amount then due thereon from Prince to others of said members of the Board. Among the open trades so transferred and settled were trades with members of the Board who held securities on margin certificates furnished by Prince. ' The market was constantly changing, and 'if the trades with the members holding Prince margin certificates had been closed at the opening of the Board of Trade on that day by the members holding them, there would have been due from them to Prince in the aggregate a balance of approximately one-third of the amount of the certificates after deducting therefrom the amount that would have been due to them from Prince. If the trades had been closed later in the day, the balance coming to Prince would have been considerably less. However, if Prince had carried out all of these contracts, the profits which would have been made upon some of them would have been about balanced by the losses which he would have sustained on others.'

(6) On February 15, 1905, the proceedings in bankruptcy were instituted, and the appellee was eventually appointed trustee in bankruptcy. The indebtedness of the bankrupt at the date of the above-mentioned transfer of his trades exceeded the sum of $100,000 to numerous creditors, aside from the bank, and his assets were less than $50,000 in value.

(7) Circumstances appear in the relations between the bank and Prince which leave no room for doubt that the bank...