Carey v. Donohue

• Decision Date: 02 December 1913
• Docket Number: 2,368.
• Citation: 209 F. 328
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: CAREY v. DONOHUE.

209 F. 328

CAREY v. DONOHUE.

No. 2,368.

United States Court of Appeals, Sixth Circuit.

December 2, 1913

Michael G. Heintz, Benton S. Oppenheimer, and Morrison R. Waite, all of Cincinnati, Ohio (Waite & Schindel, of Cincinnati, Ohio of counsel), for appellant.

Willis G. Durrell and David Davis, for appellee.

Before WARRINGTON, KNAPPEN, and DENISON, Circuit Judges.

WARRINGTON Circuit Judge.

This was a suit brought by the trustee against the appellant and others, in the District Court, to set aside an instrument, in form a deed, from the bankrupt to the appellant, conveying certain described real estate. All the respondents except appellant were dismissed during the trial. Appellant conveyed the property to certain of the respondents, who were found to have been innocent purchasers; and decree was entered in favor of the trustee for the value of the property in question, as fixed by the verdict of a jury, which was impaneled only for that purpose.

The case was brought to this court upon appeal and error. Counsel are all agreed that appeal was the proper proceeding, and this is so clearly right that the error proceeding will be dismissed. The principal objections made to the decree will be stated as we progress.

1. It is urged that the bill and its amendments do not sustain the decree. These pleadings fail to disclose with certainty upon what theory the suit was instituted; that is to say, whether the design was to charge that the instrument was given with intent on the part of the bankrupt to hinder, delay, or defraud his creditors and so was null and void under section 67d of the Bankruptcy Act (Act July 1, 1898, c. 541, 30 Stat. 565 (U.S. Comp. St. 1901 p. 3449)), or whether it was meant to charge the execution of a preference within the meaning of section 60 of the act. It would seem that the purpose was to charge the commission of these acts alternatively, and the trial court appears to have given permission so to do; but, apart from any question of right thus to plead, the bill and the amendments alike state conclusions of law rather than specific facts. However, the appellant appears to have understood the trustee to charge the execution of a preference, for, after denying knowledge of insolvency of the bankrupt, appellant averred that he 'had no reasonable cause to believe that he (the bankrupt) was insolvent, and did not know and had no reasonable cause to believe that said conveyance from said John E. Humphreys to Walter J. Carey would create a preference over any other of the creditors of the said John E. Humphreys. ' In spite of this it is contended that appellant was not 'notified that he must answer to the charge that, at the time he accepted the deed from Humphreys he had reasonable cause to believe that the enforcement of the transfer would effect a preference. ' No objection was made on this ground to the bill and its amendments, and indeed their sufficiency was in no wise challenged. Besides, the case was tried upon the theory of preference, and this was also the basis of the decree.

It is true, as counsel claim, that this court has held that, in a suit to set aside a voidable preference, it is necessary to allege that the person receiving the transfer had reason to believe that it was intended to give 'a preference forbidden by law.' In re Leech, 171 F. 622, 625, 96 C.C.A. 424. While that decision was rendered before, and the present transaction occurred since, the amendment of 1910 (Act June 25, 1910, c. 412, Sec. 11, 36 Stat. 842 (U.S. Comp. St. Supp. 1911, p. 1506)) to section 60b, yet the element of reasonable belief of the creditor remains as a fact necessary in substance to allege. However, if the case made is otherwise sound, the most that could be accorded appellant would be to reverse and remand the cause for the purposes only of further and appropriate amendment to the bill and re-entry of the decree. Page v. Rogers, 211 U.S. 575, 581, 29 Sup.Ct. 159, 53 L.Ed. 332; Dietz v. Horton Mfg. Co., 170 F. 865, 872, 96 C.C.A. 41 (C.C.A. 6th Cir.); Newcomb v. Burbank, 181 F. 334, 336, 104 C.C.A. 164 (C.C.A. 2d Cir.). This could work no injury to any material right of appellant, and to do more than this would clearly prejudice the rights of the trustee and the creditors. It has been aptly said that 'the bankruptcy act is remedial and should be interpreted reasonably and according to the fair import of its terms, with a view to effect its objects and to promote justice' (Botts v. Hammond, 99 F. 916, 920, 40 C.C.A. 179 (C.C.A. 4th Cir.)); and in working out these ends the bankruptcy courts have not indulged in technicalities wherever a liberal procedure was consistent with the substantial rights of the parties in interest.

2. It is contended that the evidence does not sustain the decree. The decree recites that the evidence was 'adduced in open court,' and after finding that the 'paper writing, purporting to be a deed' for the real estate in dispute, bears date August 6, 1910, and was recorded November 15, 1910, 'within four months before the adjudication of John E. Humphreys, a bankrupt,' it proceeds:

' * * * The court finds that the said John E. Humphreys was insolvent on August 6, 1910, and that said Walter J. Carey had at that time reasonable cause to believe that such a transfer to him, if made, would effect a preference, being given in payment of an antecedent debt. The court finds that said deed from Humphreys to said Carey, whether regarded as a transfer of title or as security for debt, is invalid.'

All the witnesses except the bankrupt testified in open court, and irrespective of his testimony it is plain enough from the record that the finding should be sustained as to the fact of his insolvency at the date named; and it is equally clear that the effect of any enforcement of the transfer in issue would be to enable appellant to obtain a greater percentage of his debt than any other of the creditors of his class. A more difficult question arises respecting the existence of reasonable cause on the part of appellant at the date of the instrument to believe that his transaction with the bankrupt would, if carried out, effect a preference. Every question of this kind is necessarily controlled by the facts and circumstances of the particular case. Aside from some principles that have general application, it rarely happens that the facts and circumstances of other cases, even though kindred in character, are helpful in solving the question in hand.

Thus it is a general rule that mere suspicion on the part of the creditor that his debtor is insolvent or that the effect of a given transaction with him would amount to a preference is not enough (First National Bank v. Abbott, 165 F. 852, 859, 91 C.C.A. 538 (C.C.A. 8th Cir.); Stucky v. Masonic Savings Bank, 108 U.S. 74, 75, 2 Sup.Ct. 219, 27 L.Ed. 640), for, in the absence of substantial evidence in that behalf, his suspicions are fairly consistent with the ordinary desire of the creditor to assure himself of safety respecting the debt. On the other hand, general reputation for solvency of a debtor is not always a safe test of the good faith of his creditor who obtains or receives from him a transfer of property, because the relations between them and the circumstances of the transaction itself may satisfy every impartial mind that the particular creditor had abundant reason to believe that his debtor's financial reputation was false, while this might not be true at all in the debtor's transactions of an ordinary character with other persons. We say this both because of the claim made here touching the bankrupt's reputed solvency and of its apparent explanation of some of the transactions that are in evidence, though not involving a transfer of any of his own property, and in which not even a suspicion of insolvency was aroused.

One way of testing the belief that should be imputed to the creditor receiving either a payment in money or a transfer of property in discharge of a past-due debt is to inquire whether reasonable cause to believe actually existed. Thus in Hewitt v. Boston Straw Board Co., 214 Mass. 260, 101 N.E. 424, 425, decided April 1, 1913, the Supreme Judicial Court of Massachusetts, when considering a transfer alleged to be a preference under section 60 of the Bankruptcy Act, said:

'Where there is reasonable cause to believe that at the date of transfer within the statutory period the debtor is insolvent, and payment is accepted of a debt overdue, it is immaterial whether the creditor actually believes what may have been disclosed as to the true state of affairs. If he prefers to draw inferences favorable to himself and to ignore information which would have led to knowledge that his debtor was in failing circumstances, he cannot set up his own judgment to the contrary, even if honestly entertained, as a reason why he should be permitted to retain a prohibited advantage.'

It is strenuously urged that, in considering the question of appellant's reason to believe in the existence of facts amounting to a preference, the testimony of the bankrupt shall be excluded. His testimony was taken in Honduras upon direct and cross interrogatories, but he declined to answer some of the cross-interrogatories for the reason, as he stated, that they 'might tend to incriminate' him and a motion was made to suppress all his testimony because of his refusals to answer such cross-interrogatories. The motion was overruled, and we think rightly. It is to be observed that section 860 of the Revised Statutes (U.S. Comp. St. 1901, p. 661) was repealed before such refusals were made (Act May 7, 1910, c. 216, 36 Stat. 352); and this of course removed the foundation of that class of decisions which enforced answers by reason of the immunity the...