Mutual Savings & Loan Association v. McCants, 6086.

• Decision Date: 31 July 1950
• Docket Number: No. 6086.,6086.
• Parties: MUTUAL SAVINGS & LOAN ASSOCIATION et al. v. McCANTS. In re BROOME'S MEN'S SHOP.
• Court: U.S. Court of Appeals — Fourth Circuit

183 F.2d 423 (1950)

MUTUAL SAVINGS & LOAN ASSOCIATION et al. v. McCANTS. In re BROOME'S MEN'S SHOP.

No. 6086.

United States Court of Appeals Fourth Circuit.

Argued June 30, 1950.

Decided July 31, 1950.

E. W. Mullins, Columbia, S. C. (Nelson, Mullins & Grier, Columbia, S. C., on brief), for appellants.

John E. Edens and Edward Mobley Woodward, Columbia, S. C., for appellee.

Before PARKER, Chief Judge, SOPER, Circuit Judge and GILLIAM, District Judge.

PARKER, Chief Judge.

This is an appeal in a controversy arising in the bankruptcy proceedings of Broome's Men's Shop, a corporation adjudged bankrupt upon an involuntary petition. The acts of bankruptcy consisted in the giving of two chattel mortgages upon the stock of goods of the corporation which were recorded within four months of the filing of the petition and at a time when the corporation was found to be insolvent. After the adjudication, the mortgagees filed petitions claiming liens by virtue of the mortgages and denying that the corporation was insolvent when they were recorded. The referee held that it was insolvent at that time and that the mortgagees were not entitled to a lien by virtue of their mortgages but were entitled to prove the mortgage debts as unsecured claims against the estate. Upon review by the judge the referee's action was affirmed as to the finding of insolvency and the denial of a lien to the mortgagees and also as to allowing one of the mortgagees to prove an unsecured claim but was reversed as to the unsecured claim allowed the other mortgagee on the ground that this did not represent a valid indebtedness. Both mortgagees have appealed and two questions are presented for our consideration: (1) whether the court erred in finding that the corporation was insolvent at the time of the recording of the mortgages and (2) whether the note and mortgage denied proof as an unsecured debt was a valid indebtedness of the corporation.

On the first question, extended testimony was taken as to the financial condition of the corporation from the time of its organization; and both the referee and the judge reached the conclusion, which we think was amply supported, that it was insolvent not only on November 20, 1947, when the mortgages were recorded, but also for some time prior thereto. As said by the judge in his opinion reviewing the action of the referee: "The business venture, out of which this matter arose, was started, with inadequate capital, about the last day of January, 1947, and was insolvent before November 20 of that year, and likely was at the time of its incorporation which occurred on May 5, 1947."

On March 1, 1948, the corporation was so hopelessly insolvent that it turned over its business to the mortgagees whose mortgages had been taken in May of the preceding year but had been held off the record until November 20. At the time of the turnover, it owed debts of more than $35,000 and its assets did not exceed $22,500. There is nothing in the record to indicate that its condition was any better than this on the preceding November 20, when the mortgages were recorded. On the contrary, the business had in the meantime gone through the usually profitable Christmas season; and it is reasonable to assume that it was in better condition on March 1, 1948, than on the preceding November 20, since nothing that could have occasioned loss is shown to have occurred. Approximately $25,000 of the claims outstanding when the petition in bankruptcy was filed were owing on November 20, and the bank records show that within ten days after that date over $4700 was paid on debts which must have been owing at that time. In the face of testimony such as this and in the absence of anything to show solvency on the crucial date, we would not be justified in disturbing the concurrent findings of the judge and referee, arrived at after a careful sifting of all the evidence available bearing on the financial condition of the corporation from the time of its organization until the filing of the petition in bankruptcy.

It is true that the insolvency of the bankrupt for the purposes of this case must be determined as of the date when the mortgages were recorded and that, in making such determination, assets must be valued at what they were reasonably worth at that time, and not at what they turned out to be worth sometime later after bankruptcy had supervened. Everett v. Warfield Mining Co., 4 Cir., 37 F.2d 328. The insuperable difficulty that confronts appellants, however, is that both the referee and the trial...