Benner v. Scandinavian American Bank

• Decision Date: 07 May 1913
• Citation: 73 Wash. 488,131 P. 1149
• Parties: BENNER v. SCANDINAVIAN AMERICAN BANK.
• Court: Washington Supreme Court

131 P. 1149

73 Wash. 488

BENNER v. SCANDINAVIAN AMERICAN BANK.

Supreme Court of Washington

May 7, 1913

Department 2. Appeal from Superior Court, Pierce County; C. M Easterday, Judge.

Action by J. D. Benner, as trustee in bankruptcy of the Gawley Foundry & Machine Works, a bankrupt, against the Scandinavian American Bank. From a judgment for plaintiff, defendant appeals. Affirmed.

J. A. Sorley and Williamson, Williamson & Freeman all of Tacoma, for appellant.

Raymond J. McMillan, of Tacoma, for respondent.

FULLERTON J.

This action was instituted by J. D. Benner, as trustee in bankruptcy of the Gawley Foundry & Machine Works, against the Scandinavian American Bank to recover the value of a coasting vessel which the machinery company had transferred to the bank as security for a debt owing by it to the bank. The action was based on the ground that the transfer was void as against the creditors of the machinery company because made within four months of the filing of the petition in bankruptcy against it, thereby creating a preference in favor of the bank forbidden by the bankruptcy act. The trustee recovered in the court below, and the bank has appealed.

The bank and the machinery company were both domestic corporations doing business at Tacoma, Wash. The relation between the bank and Joseph Gawley, the manager and chief owner of the machinery company, were more or less intimate. Gawley owned some 50 shares of the capital stock of the bank and the banking business of the machinery company, as well as Gawley's private banking business, was done with the bank. In its earlier years the machinery company was a prosperous concern, its business was large, and the bank extended to it an extensive credit; its indebtedness to the bank at times running as high as $70,000. The machinery company's business was somewhat varied, and it became the owner and operator of a coasting steam vessel called 'The Advance,' which was duly enrolled in the name of Joseph Gawley under the laws of the United States at the office of the collector of customs for the Puget Sound district. In the earlier part of the year of 1909 the machinery company for some reason not explained in the record withdrew its banking account from the appellant bank, and began banking elsewhere. At this time the company owed the appellant bank some $15,000 which was evidenced by promissory notes made by the machinery company to the bank and indorsed by Joseph Gawley individually. The bank was not satisfied with the indebtedness as it stood, and solicited the company through Gawley for some satisfactory settlement of the account. After considerable negotiation a settlement was had on May 6, 1909. At that time Joseph Gawley turned over to the bank, or to one of its directors, in payment of the machinery company's account, the capital stock of the bank which he held individually for the sum of $5,500, which is conceded to be its then fair cash value, paid to the bank $1,800 in cash, and gave the machinery company's demand note for the balance, $7,700, which note he promised to secure by a chattel mortgage or a bill of sale on the coasting vessel before mentioned. On July 9, 1909, pursuant to the agreement, a bill of sale was executed by Joseph Gawley to the bank purporting to convey to it absolutely the coasting vessel for the sum of $5,000. It was understood, however, by both parties to the instrument that the instrument was a mortgage to secure the machinery company's note to the bank. The bill of sale was by the agreement of the parties withheld from record, and the machinery company continued as a going concern. Shortly thereafter Joseph Gawley as the representative of the machinery company made a written statement of its assets and liabilities in which he included the coasting vessel as part of the machinery company's assets, but made no mention of the bill of sale. The statement showed the machinery company to be in a flourishing condition, and on the strength thereof and other representations the machinery company was enabled to borrow from one banking firm the sum of $15,000, and from another the sum of $3,000, without security other than the individual indorsement of Joseph Gawley.

The machinery company was in straightened circumstances long prior to its settlement with the appellant bank, a condition which the officers of the bank knew, although they may not have known its exact situation. It was found by the trial court, and we think the evidence justifies the finding that the machinery company was at the time of the settlement wholly insolvent, that its assets did not exceed $20,000, while its liabilities exceeded $100,000. Later on actions were started against the machinery company by certain of its creditors in one of which a default judgment was entered. Still later, and on October 27, 1909, with knowledge of the pendency of these actions, the appellant bank caused its bill of sale to be recorded in the office of the collector of customs where the vessel was enrolled, and thereupon took possession of the vessel. On January 19, 1910, the machinery company was adjudged a bankrupt, and the respondent J. D. Benner was appointed trustee in bankruptcy of its property. On April 7, 1910, the bank began foreclosure proceedings on its bill of sale, alleging that the same was intended as a mortgage to secure the payment of the note of the machinery company, naming the respondent Benner, among others, as a party defendant to the action. No service of process, however, was made upon Benner, and the action went to judgment and order of sale against the other parties defendant. At the sale the vessel was purchased by the appellant for the sum of $5,000. The costs of the foreclosure proceedings were $719.10. The court found the reasonable value of the vessel to be $5,500, and further found that the appellant bank on taking possession of the vessel paid lienable claims to which it was subject in favor of certain employés and persons furnishing materials and making repairs thereon, aggregating $1,094.07. This sum the court deducted from the value of the vessel as it found that value to be and entered a judgment in favor of the trustee in bankruptcy for the remainder; but refused, contrary to the request of the appellant, to allow a deduction for the costs of the foreclosure proceedings.

The statutes of the United States, relating to the recording of vessels enrolled under the Laws of the United States, reads as follows: 'Sec. 4192. No bill of sale, mortgage, hypothecation, or conveyance of any vessel, or part of any vessel, of the United States, shall be valid against any person other than the grantor or mortgagor, his heirs and devisees, and persons having actual notice thereof, unless such bill of sale, mortgage, hypothecation, or conveyance is recorded in the office of the collector of the customs where such vessel is registered or enrolled. The lien by bottomry on any vessel, created during her voyage, by a loan of money or materials necessary to repair or enable her to prosecute a voyage, shall not, however, lose its priority, or be in any way affected by the provisions of this section.' Rev. St. § 4192 (U. S. Comp. St. 1901, p. 2837). The Bankruptcy Act contains the following sections: 'Sec. 60. A person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition, or after the filing of the petition and before the adjudication, procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. Where the preference consists in a transfer, such period of four months shall not expire until four months after the date of the recording or registering of the transfer, if by law such recording or registering is required.' Remington on Bankruptcy, p. 1780. 'Sec. 67. (a) Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate. (b) Whenever a creditor is prevented from enforcing his rights as against a lien created, or attempted to be created, by his debtor, who afterwards becomes a bankrupt, the trustee of the estate of such bankrupt shall be subrogated to an may enforce such rights of such creditor for the benefit of the estate.' Remington on Bankruptcy, p. 1783. From an examination of the dates above given it will be observed that the bill of sale, which is thought to have created a voidable preference in favor of the appellant bank over other creditors of the bankrupt, was executed on July 9, 1909, and recorded with the collector of customs where the vessel was enrolled on October 27, 1909, that the vendor in the bill of sale was adjudged a bankrupt on January 19, 1910, and that four months did not elapse between the date of recording the transfer and the adjudication of bankruptcy.

It is the contention of the appellant that the instrument under which it claims is not such an instrument as the bankruptcy act requires to be recorded; and, since it was executed more than four months prior to the filing of the petition in bankruptcy, it was not avoided by that proceeding. In support of its contention the appellant suggests two principal reasons: The first is that the section from the Revised Statutes above quoted does not require an instrument to be recorded in order to be valid against general creditors of the vendor named in the instrument, but requires recording only as against creditors who have...