CITIZENS'NAT. BANK OF GASTONIA, NC v. Lineberger

• Decision Date: 17 November 1930
• Docket Number: No. 3017.,3017.
• Citation: 45 F.2d 522
• Parties: CITIZENS' NAT. BANK OF GASTONIA, N. C., v. LINEBERGER. In re KIRBY-WARREN CO.
• Court: U.S. Court of Appeals — Fourth Circuit

45 F.2d 522 (1930)

CITIZENS' NAT. BANK OF GASTONIA, N. C., v. LINEBERGER.

In re KIRBY-WARREN CO.

No. 3017.

Circuit Court of Appeals, Fourth Circuit.

November 17, 1930.

E. T. Cansler, of Charlotte, N. C. (A. C. Jones, of Gastonia, N. C., and Cansler & Cansler, E. T. Cansler, Sr., and M. C. Moysey, all of Charlotte, N. C., on the brief), for appellant.

P. W. Garland, of Gastonia, N. C., and Charles W. Tillett, Jr., of Charlotte, N. C. (Tillett, Tillett & Kennedy, of Charlotte, N. C., on the brief), for appellee.

Before PARKER and NORTHCOTT, Circuit Judges, and GRONER, District Judge.

PARKER, Circuit Judge.

This is an appeal in an action at law instituted by the trustee in bankruptcy of the Kirby-Warren Company to recover alleged preferences given to the Citizens' National Bank of Gastonia, N. C. The learned trial judge directed a verdict in favor of the trustee, and from judgment thereon the bank has appealed.

The Kirby-Warren Company, a mercantile corporation of Gastonia, N. C., in March, 1927, found itself in financial difficulties and unable to pay its creditors. It was indebted to the Citizens' National Bank of Gastonia in the sum of $14,700, represented by notes of the following amounts and maturities: $4,500, March 10th; $1,500, March 16th; $5,500, April 8th; $600, April 14th; and $2,600, April 15th. All of these were indorsed by M. F. Kirby, Jr., and W. Y. Warren, officers of the corporation and owners of its stock, who were solvent. The total liabilities of the company were in excess of $52,000. Its assets consisted of a stock of merchandise, fixtures, accounts, etc., valued in a financial statement of February 1st at $61,723.73, but by appraisers in bankruptcy on April 5th at $22,809, and sold by the trustee a short while afterwards for $19,977.

There is no evidence that the bank had any notice of the financial difficulties of the company until the night of Saturday, March 12th. On that night, Kirby and Warren met the president of the bank and their attorney at the office of the bank, and went over the company's affairs for the purpose of determining what was to be done to meet the pressing claims of creditors. They had before them the financial statement of February 1st, showing the assets of the company to be $61,723.73 and its liabilities, exclusive of capital stock, to be $44,649.43. All present at the meeting testify that they considered the corporation solvent at that time; but it was decided, nevertheless, to submit an offer in compromise to mercantile creditors of 25 per cent. of their claims. On March 15th the attorney of the company, in accordance with this decision, wrote a letter to such creditors making this offer, calling a meeting for March 24th to consider same and stating that, at a forced sale, the stock and fixtures of the company would not bring over 33 1/3 per cent., its accounts not over 25 per cent., and that insolvency proceedings would probably result in a dividend of less than 25 per cent.

The testimony is that the president of the bank was called into the conference because he was a brother-in-law of Kirby, and not because of his connection with the bank, and that he took no part in advising with regard to the sending of the letter; but it is clear that he was informed as to the condition of the company and knew that a letter proposing the compromise was to be sent. This letter contained a statement to the effect that pending the meeting of creditors the assets of the company would be fully protected and preserved in the interest of all creditors, and that any effort on the part of a creditor to obtain any preference by legal proceedings, or otherwise, would result immediately in insolvency proceedings. The attorney who sent the letter was a director of the bank and a member of its finance committee; but he sent it not as representing the bank but as representing the company, and it is not shown that the president or any other officer of the bank saw the letter or knew that it contained this statement.

On Monday, the 14th, following the meeting on the night of Saturday the 12th, the bank collected $2,100 on the note of $4,500 which fell due on the 10th, and took a renewal note for $2,400 due May 9th. The $2,100 included what was approximately the balance which the company had on deposit at the close of business on the 12th, the exact balance being $611.15, and a payment of $1,500 which Kirby made under the following circumstances: Kirby owed the company $1,500. He applied to the bank for a loan to pay this; and the bank agreed to make him the loan, but only on condition that the proceeds thereof be applied on the company's note to the bank. He accepted this condition and gave the bank his note for $1,500, secured by collateral. The proceeds of the loan were deposited to the credit of the company, and the company's check was given to the bank for the sum of $2,132, the $32 being for interest.

Following this transaction, the company continued in business until April 1st, moneys taken in by it being deposited in the bank from day to day in regular course of business in an account subject to check. In addition to the check for $2,132, to which we have referred, 27 checks, aggregating the sum of $1,381.76, were honored and paid by the bank, leaving a balance of $3,486.32. Except in the case of one postdated check given prior to March 12th, some outstanding checks which had previously been dishonored, and some checks given for merchandise shipped C. O. D., none of the checks represented payments made to mercantile creditors. On the sending out of the letter, the attorney advised the company to make no further payments to mercantile creditors; but it is not shown that any officer of the bank had notice of this advice. The deposits during the month of March were only slightly larger than during the month of February, considerably less than during the month of January, and practically the same as the deposits of March of the preceding year. The daily balance was larger than during the month of February and the latter half of January, but not larger than during the month of December and the first half of January. There is no evidence of any agreement that the deposits should be made to extinguish indebtedness due the bank, that they should be piled up as security against which the bank might assert its bankers' lien, that they should not be subject to withdrawal at the will of the depositor, or that they differed in any way from ordinary deposits subject to check made in the usual course of business.

The creditors' meeting called for March 24th was postponed at the request of one of the creditors to March 28th and then to April 1st. On the latter date, upon the insistence of one of the creditors that the company be placed in the hands of a receiver, it filed a voluntary petition in bankruptcy. Thereafter the bank credited the balance on deposit on the company's notes which it held.

Under the practice prevailing in North Carolina, issues were submitted to the jury, which, under the direction of the court, they answered as follows:

"1. Was Kirby-Warren Company insolvent from March 12, 1927 to date of adjudication of bankruptcy as alleged in the complaint? Answer: Yes.

"2. Did the defendant on or about the 14th day of March, 1927, receive a preference not allowed by law as alleged in the complaint? Answer: Yes.

"3. If so, what was the amount of such preference? Answer: $2100.00.

"4. Did the defendant, without legal right, seize funds of Kirby-Warren Company on deposit with it after the adjudication of bankruptcy? Answer: Yes.

"5. If so, in what amount? Answer: $3486.32."

The bank duly excepted to the direction given the jury as to answering the issues, prayed the direction of a verdict in its own favor, and requested a number of special instructions bearing on the law, which, in the view we take of the case, it is not necessary for us to consider.

On the second and third issues, which relate to the $2,100 transaction, we think there can be no question that the instruction complained of was erroneous. As heretofore stated, $600 of this amount represented funds on deposit to the credit of the company when the bank first learned of its financial difficulties. Not only was this $600 deposited in regular course of business, but there is nothing in the record to show that at the time of its deposit the bank had any reason to even question the solvency of the depositor. It held at the time a past-due note of the company for $4,500 and had the right to credit this deposit on the note, even though in the meantime it may have received notice of the company's insolvency. New York County Bank v. Massey, 192 U. S. 138, 24 S. Ct. 199, 48 L. Ed. 380; Continental & Commercial Trust Co. v. Chicago Title Co., 229 U. S. 435, 33 S. Ct. 829, 57 L. Ed. 1268; In re Wright-Dana Hardware Co. (C. C. A. 2d) 212 F. 397. And it can make no difference that, instead of merely charging off the deposit and crediting it on the note, the same result was accomplished by accepting and crediting a check drawn against the deposit. Studley v. Boylston Bank, 229 U. S. 523, 529, 33 S. Ct. 806, 57 L. Ed. 1313; Drugan v. Crabtree (C. C. A. 4th) 299 F. 115; Murray v. Corn Exchange Bank (D. C.) 31 F.(2d) 373, affirmed (C. C. A. 2d) 31 F.(2d) 375; Jandrew v. Guaranty State Bank (C. C. A. 5th) 294 F. 530; In re Cross (C. C. A. 2d) 273 F. 39; Toof v. City Nat. Bank of Paducah, Ky. (C. C. A. 6th) 206 F. 250; Wilson v. Citizens' Trust Co. (D. C.) 233 F. 697, 699; Putnam v. U. S. Trust Co., 223 Mass. 199, 111 N. E. 969; Wrenn v. Citizens' National Bank, 96 Conn. 381, 114 A. 120, 122.

The $1,500 embraced in the $2,100 transaction represented a payment by Kirby, who was an indorser of the $4,500 note upon which the payment was credited. Whether this transaction be regarded as a payment by Kirby to the bank on the note which he had indorsed, with a credit for same on the debt which he owed the company, or whether it...