Allen v. McMannes

• Decision Date: 29 October 1907
• Docket Number: 186.
• Citation: 156 F. 615
• Parties: ALLEN v. McMANNES.
• Court: U.S. District Court — Western District of Wisconsin

156 F. 615

ALLEN v. McMANNES.

No. 186.

United States District Court, W.D. Wisconsin.

October 29, 1907

Richmond Jackman & Swansen and Orton & Osborn, for complainant.

H. C Martin and Bashford, Aylward & Spensley, for defendant.

SANBORN District Judge.

This is a bill in equity, brought by complainant as trustee in bankruptcy of Lorenzo Clark, to avoid an alleged preference made by the bankrupt on July 31, 1906. On that day the bankrupt and his wife, Bessie Clark, joined in a bill of sale to the defendant, covering a stock of boots and shoes and store fixtures. The bill of sale recited that defendant had and claimed a chattel mortgage on the property, and should take such property in full payment for the debts secured by the chattel mortgage; that the sale was in full for the amount due from Clark to the defendant. It was agreed that the property should be sold by defendant as soon as possible that he should have private occupancy of the lower part of the building in which the goods were situated, until they were sold, upon payment of a stipulated rent. If the property should bring more than the amount of the debt, the surplus was to belong to the bankrupt. Defendant was to conduct the sale and account for the proceeds. It was further recited that the book accounts belonged to the bankrupt, but might be paid either to said Clark or defendant, either being authorized to collect and give receipts, but, when collected, to belong to said Clark, so far as necessary to pay any of Clark's merchandise debts. The consideration of the sale was recited to be the sum owed by said Clark to defendant on certain notes secured by the chattel mortgage, amounting to $8,089.56, and that such indebtedness was paid by the sale and transfer. It was alleged in the bill of complaint that at the time of making said bill of sale Clark was insolvent, and made the sale with intent to prefer the defendant and to defraud his other creditors in violation of the bankrupt act, and that the value of the property transferred was $8,000, and that defendant at that time had reason to believe and to know, and did know, that said Clark was insolvent, and that said payment to him was for the purpose of preferring him as a creditor of said Clark. The bill does not contain any general prayer for relief, but only for the issue of a subpoena and to have the defendant answer but not under oath, but it was assumed on hearing that the suit was brought for the purpose of compelling defendant to account for the value of the property sold and to have sale declared invalid as a fraud on the bankrupt act. The answer denies that Clark was insolvent at the time of making the bill of sale, that the defendant knew, or had reason to believe, that Clark was insolvent; denies that he made the transfer with intent to prefer defendant or to defraud other creditors; further denies that defendant had reason to believe or to know, or did know, that said Clark was insolvent and that said payment was for the purpose of preferring him as a creditor; further denies that defendant had reason to believe that Clark was insolvent. The answer admits that the property transferred was worth $8,000 at the cost price, but denies that it was worth that sum for immediate conversion at quick or forced sale. It appears in evidence that in the year 1895 the bankrupt was working for the defendant in his boot and shoe store, and in January of that year defendant sold out the stock of boots and shoes to the bankrupt for $8,966.14, $1,216.14 of which was paid in cash and the balance in notes secured by chattel mortgage. The mortgage was renewed several times; the last renewal being made in January, 1905. There was an understanding between the parties that the mortgagor might sell the property in the ordinary course of business and apply the proceeds to his own use. This understanding rendered the mortgage void as to the creditors of the bankrupt. Other questions are raised as to the validity of the mortgage, but they seem to be immaterial in view of the effect of this understanding. In March, 1901, the bankrupt purchased the store building from the defendant for $4,000. In order to raise the money to pay for the building, the bankrupt was obliged to borrow it, or the greater part of it. The person who lent this money did not take any security upon the store building, but some part of the debt has been paid by the bankrupt. In the latter part of July, 1906, an offer was made by one Gordon to purchase the store building for $4,500 and a portion of the stock of boots and shoes for $3,500. It was contemplated that the $3,500 was to be paid to the defendant on his chattel mortgage debt. This offer was accepted by the bankrupt, but he was unable to carry it through, because his wife refused to sign the deed of the store property, on the ground that it was her homestead. When the defendant learned that the sale had fallen through, he immediately demanded that his debt be paid, and it was then proposed by the bankrupt to turn over the stock to him in full payment of his debt. At this time both of the parties supposed that the chattel mortgage was valid, and that the defendant had the right to take the stock and apply it in payment of such indebtedness. Defendant knew that the bankrupt was indebted to other creditors for merchandise covered by the bill of sale, but it appears in evidence that Clark told defendant, and later repeated the same statement in the presence of Mr. H. C. Martin, his attorney, that the indebtedness to other creditors was $1,500, and that he had sufficient book accounts to pay such indebtedness. Defendant took no steps to satisfy himself in respect to the book accounts or the amount of the indebtedness. He was well acquainted with the situation; knew the value of the store property, and the value of the merchandise which he took in satisfaction of his debt. Had he supposed that the transfer was subject to be disputed or set aside by creditors, he would undoubtedly have taken further precautions. By mistake of law, he supposed that his chattel mortgage was valid, and this led him to be less vigilant than he otherwise would have been, but it is entirely clear that he knew practically the whole situation. He knew that Clark had been unable to sell the real estate and merchandise, and he understood that there were merchandise debts, and that Clark was closing out all of his property with which he was doing business. As a matter of fact, Clark was insolvent at the time. The sale was not in the ordinary course of business, and the defendant knew that the property was a homestead; that Clark had borrowed the money to pay for it; that the debt to defendant had been increasing; that Clark had obligated himself to pay for a patent right; that he was indebted to merchandise creditors in the sum of at least $1,500. In fact, the defendant knew pretty much everything that Clark knew about the situation, except the amount of the book accounts, which Clark told the defendant were sufficient to pay his merchandise debts. These book accounts were of very little value, probably not to exceed $200 at that time.

The sale of an entire stock of goods of a retail merchant is a suspicious circumstance per se, naturally calculated to put the purchaser on inquiry. Walbrun v. Babbitt, 16 Wall. 577, 21 L.Ed. 489; In re Knopf (D.C.) 146 F. 109; Dokken v. Page, 147 F. 438, 77 C.C.A. 674. Such a purchase is presumptively questionable, and casts the burden of proof on the purchaser to show that he had no notice of facts or circumstances sufficient to arrest his attention, puts him on inquiry, and requires him to use such means of knowledge as were at hand in order to learn whether the seller is not in financial difficulty, and whether a general statement, such as that the book accounts are sufficient to pay the mercantile creditors, was true. Thomas v. Adelman (D.C.) 136 F. 973; English v. Ross (D.C.) 140 F. 631; In re Hines (D.C.) 144 F. 544; Jackman v. Eau Claire National Bank, 125 Wis. 485, 104 N.W. 98; In re Pease (D.C.) 129 F. 448; Roberts v. Johnson, 151 F. 567, 81 C.C.A. 47.

Counsel for defendant recognize that the rules just stated are salutary and well settled; but urge that a full inquiry would have disclosed neither the insolvency of the bankrupt nor his intent to prefer. I find from the evidence, however, that investigation would have disclosed Clark's insolvency. Defendant could have found in the store that the mercantile debts were $1,540, and by inquiry could have learned that the note to Mrs. Tyson was $410, the debt for the store building $3,295, and to the bank $300. His own claim was $8,089.56. The total is $13,634.46. Taking the value of the stock at $8,000, the store building at $4,500, the household goods at $200, the amount is $12,700. Defendant could have ascertained by looking at the list of accounts that they were not worth more than $300 or $400 at the outside figure. It may also be said that the stock was hardly worth $8,000 or the store building $4,500. Defendant had recently sold the latter for $4,000. The stock realized only $5,500 at a forced sale; but taking the property at the extreme highest limit, and also excluding the note given for the patent right, the result is the same, and shows insolvency. The whole situation shows that Clark was in financial difficulty. His wife was claiming a homestead exemption, and refusing to join in a sale of the homestead property for a good price. Defendant took a bill of sale of the stock as a whole, knowing that the homestead creditors were not paid, and not intended to be, also without verifying Clark's statement that the accounts would pay the mercantile creditors. In view of the whole situation, I feel quite clear that the defendant had notice of facts...