229 U.S. 523 (1913), 899, Studley v. Boylston National Bank

Docket Nº:No. 899
Citation:229 U.S. 523, 33 S.Ct. 806, 57 L.Ed. 1313
Party Name:Studley v. Boylston National Bank
Case Date:June 09, 1913
Court:United States Supreme Court

Page 523

229 U.S. 523 (1913)

33 S.Ct. 806, 57 L.Ed. 1313

Studley

v.

Boylston National Bank

No. 899

United States Supreme Court

June 9, 1913

Argued April 14, 1913

APPEAL FROM THE CIRCUIT COURT OF APPEALS

FOR THE FIRST CIRCUIT

Syllabus

Nothing in the Bankruptcy Act deprives a bank with which the insolvent is doing business of the rights of any other creditor taking money without reasonable cause to believe that a preference will result.

In this case, it having been found that the deposits and payments of notes were not made to enable the bank to secure a preference by the right of setoff, the bank had a right under its agreement to set off the deposits against the notes within four months of the bankruptcy. New York County Bank v. Massey, 192 U.S. 138.

Section 68a of the Bankruptcy Act did not create the right of setoff, but recognized its existence and provided a method for its enforcement even after bankruptcy.

The right of setoff is recognized by the Bankruptcy Act, and it cannot be taken away by construction because of possibility of its abuse; nor will the act be so construed by denying such right as to make banks hesitate to carry on business, and thus produce evils of serious consequence.

200 F. 249 affirmed.

The facts, which involve the right of a bank to accept in good faith payments from an insolvent, are stated in the opinion.

LAMAR, J., lead opinion

[33 S.Ct. 807] MR. JUSTICE LAMAR delivered the opinion of the Court.

The Collver Tours Company was engaged in the business of conducting touring parties around the world, charging

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a lump sum for the tickets, which were paid for in advance. It had expended about $40,000 in advertising, which it carried on its books as an asset, and since the character of its business did not involve the possession of tangible property, it had nothing except cash on hand, goodwill and its earning capacity as a means of paying debts.

In 1907, the company opened an account with the Boylston National Bank, with which it subsequently did all of its banking business of depositing, checking, and borrowing. It notified the bank in 1909 that it had no other liabilities except what was due to the bank, and it was given a line of credit of $25,000. It borrowed that sum on the promise to repay it that year; but as it used a part of its funds to open a letter of credit account in the bank, it was permitted to renew the notes. In December, 1909, it made a statement to the Massachusetts Corporation Commission which showed that the company did not have assets sufficient to pay its liabilities, and an officer of the bank saw this statement, but the representative of the Collver Company went over the matter with the bank officers, made an explanation, and borrowed an additional sum of $5,000 in the spring or summer of 1910. During the year 1910, the debt of $25,000 was reduced to $10,000 went back to $25,000, was reduced again to $15,000, and increased to $30,000, the Collver Company making to the bank encouraging statements of its prospects and of an anticipated large sale of tickets for round-the-world tours. One note for $5,000 was paid, and the then debt of $25,000 was represented by five notes for $5,000 each, maturing September 12, 20, 30, October 3 and 14th.

The balances in bank to the credit of the Collver Company fluctuated greatly from time to time, varying from almost nothing up to as high as $54,000. As a result of sales of tickets, the company deposited large sums in August and September and smaller sums in October and November. During that period, $22,500 was paid to the

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bank, the three notes due September 12, 20, and 30 being paid by checks on the Boylston National Bank. The note for $5,000, due October 3, was charged to the company's account, and on the same day a renewal note for $2,500 was discounted. The note for $5,000 which fell due on October 14, was also charged to the deposit account, according to the custom of the bank of which the Collver Company had notice, and to which it assented. On the date of the payment by such charging of the last note to the account, the company had $19,000 left to its credit. The Collver Company continued to make deposits and to draw checks, and applied for a new loan, which was refused by the bank. On December 16, 1910, a petition in bankruptcy was filed against the company, and, after his election, the trustee brought suit against the bank to recover the $22,500, claiming that it had notice of the Collver Company's insolvency and that the payments of $22,500 were transfers which had operated to give the Boylston Bank a preference within four months of filing the petition.

In its answer, the bank alleged that it was informed and believed that the company was doing a large and...

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