Aulick v. Largent

• Decision Date: 02 October 1961
• Docket Number: No. 8240.,8240.
• Citation: 295 F.2d 41
• Parties: Mary K. AULICK, Appellant and Cross-Appellee, v. Flournoy L. LARGENT, Jr., Trustee for Ansel B. Solenberger, Bankrupt, Appellee and Cross-Appellant, v. Eldridge M. LEMLEY, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

295 F.2d 41 (1961)

Mary K. AULICK, Appellant and Cross-Appellee, v. Flournoy L. LARGENT, Jr., Trustee for Ansel B. Solenberger, Bankrupt, Appellee and Cross-Appellant, v. Eldridge M. LEMLEY, Appellee.

No. 8240.

United States Court of Appeals Fourth Circuit.

Argued January 23, 1961.

Decided October 2, 1961.

David G. Simpson and Thomas G. Scully, Winchester, Va. (Scully & Woltz, Winchester, Va., on the brief), for appellant and cross-appellee.

Flournoy L. Largent, Jr., Winchester, Va., for appellee and cross-appellant.

George G. Snarr, Jr., Winchester, Va. (Joseph A. Massie, Jr., Winchester, Va., on the brief), for appellee.

Before SOBELOFF, Chief Judge, and HAYNSWORTH and BOREMAN, Circuit Judges.

BOREMAN, Circuit Judge.

The District Court, reviewing and affirming the findings and conclusions of the referee in bankruptcy, held that a transfer of shares of corporate stock to one Eldridge M. Lemley by an insolvent, within four months prior to bankruptcy, as security for the contemporaneous endorsement by Lemley of insolvent debtor's note payable to Lemley and delivered to a creditor, Mrs. Mary K. Aulick, in satisfaction of a debt then due her from the insolvent, resulted in a voidable preference to Mrs. Aulick. This appeal followed. We are of the opinion that, on principle, we must affirm.

This case, twice styled Largent v. Lemley, is here on appeal for the third and, as we hopefully suggest, the last time. On each former appeal the case was remanded for further proceedings.¹ On this appeal Mary K. Aulick is appellant and cross-appellee. Flournoy L. Largent, Jr., trustee in bankruptcy for Ansel B. Solenberger, bankrupt, is appellee and cross-appellant. Eldridge M. Lemley has not appealed and appears here only as appellee.

Our second opinion² contained a recital of certain facts but the principal facts are more fully stated herein.

In August 1956 Lemley held a bond in the amount of $3,000 which had been sold to him by Ansel B. Solenberger, hereinafter referred to as Solenberger or bankrupt. During that month Lemley learned that the bond was a forgery and the bankrupt, upon confrontation, promised to make good the amount to Lemley. At the same time Mrs. Aulick held bankrupt's note for $5,000, a bond of one Jenkins for $4,000 which bankrupt had sold to her, and an investment in a Building and Loan Association of which bankrupt was the sole executive officer. In the early part of August 1956, Mrs. Aulick heard that Solenberger's financial affairs were in bad condition. She asked her attorney to investigate and shortly thereafter the attorney reported to her that the $4,000 bond was a forgery. At Mrs. Aulick's request, her attorney, Mr. Scully, undertook to do what he could to protect her interests. He went to see Solenberger and demanded that he provide security for the payment to Mrs. Aulick of $9,000, that being the total amount of the note and forged bond held by her. To this Solenberger agreed but suggested also that he take over and compensate Mrs. Aulick for the $1,700 which she had invested in the Building and Loan Association.

Meanwhile, Solenberger had informed Lemley that he was being pressed by Mrs. Aulick and proposed that if Lemley would endorse a $10,700 note to Mrs. Aulick, he, Solenberger, would give Lemley a note for $13,700 (representing the amount of the Aulick note plus the $3,000 owing to Lemley) and would secure Lemley by transferring to him, as collateral, a certificate for 158 shares of the capital stock of Frederick County Improvement Corporation. Lemley, after first satisfying himself that the stock certificate was genuine, offered to buy the stock but the offer was refused. Lemley then agreed to Solenberger's proposal. Solenberger then asked Mrs. Aulick's attorney if he would accept a note for $10,700 endorsed by Lemley, and the attorney, knowing Lemley to be financially responsible, agreed.

On August 16, 1956, Attorney Scully, representing Mrs. Aulick, met with Lemley and Solenberger at the latter's office. Solenberger suggested that he give his note for $10,700 payable to Mrs. Aulick and endorsed by Lemley. At Mr. Scully's proposal, however, Solenberger executed a note for $10,700 payable to Lemley, the latter then endorsed it and returned it to Solenberger. The note was then and there delivered by Solenberger to Mrs. Aulick's attorney. Later the same day, pursuant to their earlier agreement and understanding, Solenberger gave his note to Lemley for $13,700 and delivered to him the certificate for 158 shares of stock in Frederick County Improvement Corporation. Mr. Scully was not present at that time and neither he nor Mrs. Aulick had any knowledge of the agreement as to the transfer of the stock or the actual transfer thereof. A little more than a month later, Solenberger was adjudicated an involuntary bankrupt.

The $10,700 note given to Mrs. Aulick was not paid at its maturity date several months after the adjudication in bankruptcy, and she then proceeded in a state court against Lemley as endorser and secured a judgment against him for the amount of the note with interest, costs and attorney fees, which judgment was subsequently paid in full by Lemley.

It was found by the District Court, which finding is not controverted, that both Lemley and Mrs. Aulick knew Solenberger to be insolvent at the time of the execution and delivery of the notes for $10,700 and $13,700 and the transfer and delivery of the stock to Lemley. There was nothing in the way of evidence to indicate or even suggest any collusion between Lemley and Mrs. Aulick. Lemley testified that he was not acquainted with Mrs. Aulick and, so far as he knew, had never seen her. Mrs. Aulick testified that she never knew Lemley.

When this case was remanded on two prior occasions, this court entertained some doubt as to whether the full and complete facts and circumstances surrounding the bankrupt's transactions had been developed. On each remand the District Court re-referred the case to the referee. When proceedings were had on the occasion of the first remand, Mrs. Aulick was, for the first time, made a formal party although the trustee made no allegations against her. She did, however, appear and testify. Up to that point, the trustee was proceeding on the theory that the transfer and pledging of the corporate stock to Lemley was a preferential transfer as to him alone to be voided and the stock recovered, obviously under section 60, sub. a(1) as amended March 18, 1950, c. 70, § 1, 64 Stat. 24, and § 60, sub. b of the Bankruptcy Act, 11 U.S.C.A. § 96, subs. a (1), b.

Following each of the first two hearings, the referee had held that the pledge and transfer of the stock constituted a voidable preference as to Lemley alone, not only as to his antecedent and preexisting debt of $3,000 but as to the $10,700 included in the bankrupt's $13,700 note to Lemley to be secured by the stock so transferred. In each instance, upon review, the District Court held that Lemley received a voidable preference only as to his $3,000 antecedent debt, but the transfer of the stock, to the extent it was intended to secure the $10,700 included in the $13,700 note and Lemley's endorsement of Mrs. Aulick's $10,700 note, was based upon a fresh consideration and was not a voidable preference.

On the occasion of the second remand and last referral, the trustee filed a new petition charging that the transfer of the stock to Lemley constituted a voidable preferential transfer to Mrs. Aulick to secure her antecedent debt of $10,700, and also a voidable preferential transfer to Lemley to secure his antecedent debt of $3,000. Relief was demanded as against both of these parties. The privilege of presenting new and additional evidence was waived by all of the parties and the facts remain as they were when the case was last before us.

The District Court has now affirmed the referee's decision, findings and conclusions which are now the subject of this appeal and stated by the referee as follows:

"(1) Both Mr. Lemley and Mrs. Aulick had knowledge of the insolvency of the bankrupt at the time of the execution of the new notes and the transfer of the Frederick County Improvement Corporation stock to Mr. Lemley;

"(2) Both Mr. Lemley and Mrs. Aulick are properly before this court;

"(3) The transfer of the Frederick County Improvement Corporation stock for the security of the antecedent debts due Lemley and Mrs. Aulick depleted the assets of the bankrupt estate for the reason that Lemley could still assert the claim in the amount of Mrs. Aulick\'s debt paid by him to Mrs. Aulick, against the bankrupt estate;

"(4) Mrs. Aulick received Lemley\'s endorsement and eventual payment of her debt on the strength of the transfer of the stock to Lemley, thereby receiving a voidable and preferential transfer;

"(5) The payment by Lemley to Mrs. Aulick of the $10,700.00, plus $1,135.00 attorney\'s fee and costs, constituted a preferential payment, for the reason that Lemley still has his claim to assert against the bankrupt estate by virtue of his subrogation rights of Mrs. Aulick\'s claim."

An order of the referee, affirmed by the District Court, provided that the transfer of the 158 shares of Frederick County Improvement Corporation stock to Eldridge M. Lemley "be and hereby is declared a preferential transfer." It was further ordered that Lemley should assign, deliver and transfer the stock to Largent, the trustee in bankruptcy; that Mrs. Aulick should pay to the trustee the money paid to her by Lemley, viz., $11,835, and that, upon receipt of said sum, Lemley should be reimbursed to the extent of the amount paid by him to Mrs. Aulick.

The pertinent portions of the applicable statutes are set out in footnote 3 below.³

It is well established that under Section 60, sub. a(1) of the Bankruptcy Act, certain elements must be present to constitute a preference,⁴ as follows:

1. A debtor, making or suffering a transfer of his property,

2. to or for the benefit...