Adams v. Champion

• Decision Date: 04 February 1935
• Docket Number: No. 374,374
• Citation: 79 L.Ed. 880,55 S.Ct. 399,294 U.S. 231
• Parties: ADAMS v. CHAMPION
• Court: U.S. Supreme Court

294 U.S. 231

55 S.Ct. 399

79 L.Ed. 880

ADAMS

v CHAMPION.

No. 374.

Argued and Submitted Jan. 17, 1935.

Decided Feb. 4, 1935.

Mr. John F. Anderson, of Washington, D.C., for petitioner.

Mr. Harry C. Heyl, of Peoria, Ill., for respondent.

Mr. Justice CARDOZO delivered the opinion of the Court.

A trustee in bankruptcy asserts a claim against the receiver of a national bank for the value of property received by the bank as an unlawful preference. The receiver admits the validity of the claim if it is placed upon the same level as the claims of creditors at large. The trustee insists that the claim must have priority on the ground that the avails of the unlawful preference are subject to a trust.

In September, 1928, the bankrupt, John Fitzgerald, had overdrawn his deposit account with the Farmers' National Bank of Pekin, Ill., and was also indebted to the bank upon promissory notes. In response to a demand for collateral security he delivered to the bank notes of other persons, as well as a certificate of stock, the whole of the face or par value of about $35,000. Most of the securities so delivered have been returned to the trustee and are not in controversy now. Four items only are the subject of this suit.

The bank received from Fitzgerald on September 7, 1928, a certificate for ten shares of its own stock, a promissory note of Charles Graff for $3,000, a promissory note of W. C. Sommer for $1,000, and notes or bonds of Veesaert for $5,000, reduced later by $1,597.31 paid upon account. Within a period of four months (on October 26, 1928), creditors of Fitzgerald filed a petition in bankruptcy, an adjudication following in November of that year. No election was made by the trustee in bankruptcy to reclaim the collateral as an unlawful preference till July 20, 1929, or if there was an earlier election, it is not shown by the record. In the meantime the bank, which continued as a going concern until January, 1932, had disposed of three of the contested items of security as follows: On February 9, 1929, after having credited the bankrupt with a dividend of $30, it sold the ten shares of its own stock to one Cullinan, a depositor. The price was $3,000, by concession the fair value. Payment was effected by charging the deposit account of the purchaser with what was owing for the shares. On April 12, 1929, the bank collected $3,183.78 upon the note of Charles Graff by charging that amount against the deposit balance to his credit. On April 16, 1929, it collected $1,059.98 upon the note of W. C. Sommer by a charge against his balance. Nothing was received upon the Veesaert bonds, the fourth contested item, till December 1930. The bank then had a payment on account to the extent of $1,597.31 the payment being made by the deposit of a check to its credit in the First National Bank of Chicago, Ill. The balance in that account was afterwards reduced to $776.57, which latter amount, together with the bonds themselves, the receiver stands ready to transfer to the trustee.

The election by the trustee to reclaim the collateral securities in behalf of the estate was announced, as we have seen, on July 20, 1929, and was manifested by the beginning of a suit for appropriate relief. No charge was made that the transaction was voidable for any actual fraud. The suit was under section 60b of the National Bankruptcy Act (11 U.S.C. § 96(b), 11 USCA § 96(b) upon the ground that the effect of the transaction was to prefer one creditor over others, and that the creditor, the bank, had reasonable cause to believe that such effect would follow.^* Under Schoenthal v. Irving Trust Co., 287 U.S. 92, 53 S.Ct. 50, 77 L.Ed. 185, an action at law could have been maintained for the recovery of the property or its value. Without objection, however, the suit was tried in equity. Cf. Buffum v. Peter Barceloux Co., 289 U.S. 227, 235, 53 S.Ct. 539, 77 L.Ed. 1140. It ended on June 24, 1932, in a decree invalidating the transactions of September 7, 1928, as constituting a forbidden preference, and directing the return of the securities, or the value of such as had been converted into money.

During the years of litigation the bank had suffered reverses, and on January 8, 1932, it was closed by the Comptroller of the Currency. The receiver appointed by the Comptroller was not a party to the suit to invalidate the preference. After the entry of a decree, the trustee in bankruptcy petitioned for an order instructing the receiver that the four contested items were a preferred charge upon the assets, and that payment should be made accordingly. The District Court granted the relief prayed for, and upon appeal to the Court of Appeals for the Seventh Circuit the order was affirmed. 70 F.(2d) 956. A writ of certiorari issued from this court. 293 U.S. 547, 55 S.Ct. 122, 79 L.Ed. —-.

If we except a small item conceded by the receiver, we think the reasons are inadequate for the imposition of a trust in the nature of a preference upon the funds of this insolvent bank.

1. For convenience the first of the contested items, the proceeds of the stock certificate, will be considered by itself, the conclusion appropriate for this item being typical of the conclusion appropriate for the others.

The acceptance by the bank of the certificate delivered by Fitzgerald on September 7, 1928, was not a wrongful act whereby the bank forthwith became subject to the duties and liabilities of a trustee ex maleficio. One who acquires a security with reasonable cause to believe that the effect will be a preference does not from that alone become a party to a fraud. Van Iderstine v. National Discount Co., 227 U.S. 575, 582, 33 S.Ct. 343, 57 L.Ed. 652; Watson v. Adams (C.C.A.) 242 F. 441, 444, 445; Dean v. Davis, 242 U.S. 438, 444, 37 S.Ct. 130, 61 L.Ed. 419; Keppel v. Tiffin Savings Bank, 197 U.S. 356, 25 S.Ct. 443, 49 L.Ed. 790; Carson v. Federal Reserve Bank, 254 N.Y. 218, 234, 172 N.E. 475, 70 A.L.R. 435. If bankruptcy is averted altogether, or postponed beyond four months, the security will stand, though a preference was intended at the time of its acceptance. So also a change of assets or liabilities before bankruptcy arrives may mean the difference between a preference and a ratable division. Haas v. Sachs (C.C.A.) 68 F.(2d) 623; Irving Trust Co. v. Townsend (C.C.A.) 65 F.(2d) 406, 408; Mansfield Lumber Co. v. Sternberg (C.C.A.) 38 F. (2d) 614, 617; Rogers v. Page (C.C.A.) 140 F. 596, 606; In re Henry C. King Co. (D.C.) 113 F. 110, 111; Rubenstein v. Lottow, 223 Mass. 227, 229 et seq., 111 N.E. 973. The bank took the risk that in future and indeterminate contingencies it might be compelled to return what it accepted or the value. At the outset it was not a trustee ex maleficio or otherwise. It was a bailee and nothing more.

If a trust was not created in September, 1928, through the acceptance of a security which has turned out to be a preference, none was in existence on February 9, 1929, when part of that security, the certificate of stock, was delivered to a purchaser. True, by that time the debtor was in bankruptcy, but the other uncertainties, for anything here shown, were as indefinite as ever. The accurate determination of assets and liabilities had still to wait upon the process of proof and liquidation. At most the security was voidable, not void, and the trustee up to that time had made no move to avoid it. A suit would have been a sufficient election, even though not preceded by a demand (Eau Claire National Bank v. Jackman, 204 U.S. 522, 534, 535, 27 S.Ct. 391, 51 L.Ed. 596; Stephens v. Pittsburgh Plate Glass Co. (C.C.A.) 36 F.(2d) 953), but as yet there had been no suit, nor statement that a suit was coming. To turn the bank into a wrongdoer in the absence of actual fraud, to charge it with all the liabilities growing out of a constructive trust, there was need of some act of avoidance that would put the brand of guilt upon it. Cf. Boyd v. Dunlap, 1...