Cusick v. Second Nat. Bank

• Citation: 115 F.2d 150,73 App. DC 16
• Decision Date: 23 September 1940
• Docket Number: No. 7501.,7501.
• Parties: CUSICK v. SECOND NAT. BANK.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

73 App. DC 16, 115 F.2d 150 (1940)

CUSICK v. SECOND NAT. BANK.

No. 7501.

United States Court of Appeals for the District of Columbia.

Decided September 23, 1940.

Edward Gallagher, of Washington, D. C., for appellant.

E. F. Colladay and Joseph C. McGarraghy, both of Washington, D. C., for appellee.

Before GRONER, Chief Justice, and EDGERTON and VINSON, Associate Justices.

VINSON, Associate Justice.

The J. A. LaPorte Construction Company (referred to herein as the Company) was a corporation engaged in contracting for and constructing substantial engineering projects. Although it apparently possessed adequate physical equipment for the type of work done, and was successful in securing contracts, the Company was a bit shy on working capital. It is usual in this type of work for the contracting party to make payments as the work progresses, withholding a percentage pending successful completion of the job. These periodic payments will defray a substantial portion of current operating expenses, but they are not always available as soon as needed. Thus in the case of the Company a certain amount of outside credit was necessary.

In the late Spring of 1936 the Company was occupied with one large construction project, a P. W. A. financed sewage disposal plant for Arlington, Virginia. Further credit than that extended by a Virginia Bank was needed and the Company secured an introduction to the Second National Bank of Washington, D. C. (the Bank), through a substantial customer of the latter. On its request for a line of credit, the Bank required production of certain financial information, report as to the progress on the Arlington job and the general outlook. After this information had been checked, a loan of $15,000 was made to the Company on June 3, 1936. June 4th an additional loan of $5,000 was made. Thereafter, the Company regularly reported its financial condition and progress on its work to the Bank (two additional contracts were secured by it after the start of its relationship with the Bank, a sewer job for the City of Frederick, Maryland, and a federal project in Rock Creek Park, Washington, D. C.), received credit extensions, and made payments on its indebtedness thereto. Concurrently, it maintained a checking account in the Bank. Into this account it deposited the periodic payments received on its work and the proceeds of loans made by the Bank. From it the Company withdrew funds to meet its payroll and other operating expenses, and such repayments as it made to the Bank. Thus between the Company and the Bank a dual debtor-creditor relationship existed.

In the course of the transactions between the parties, the Company on November 9, 1936 reduced its indebtedness to the Bank from $23,677 to $17,500, and a note was given for that amount to mature January 8, 1937. Later, December 23, 1936, an additional loan in the sum of $5,000 was made, to mature January 11, 1937.

On January 8, 1937, the Company deposited in its account the sum of $15,806.12, a payment on the Rock Creek Park job. Some time that day the Company's Treasurer informed the Bank's President that certain payments expected in the month of January would not be received until later and requested a renewal of the $17,500 (January 8th) note. The President indicated he would take the matter up with the credit committee.¹ The next day, January 9, 1937, the Company deposited an additional $16,229.63, a payment on the Frederick, Maryland job. Later that same day, a Saturday, the Bank applied the Company's deposits (consisting almost entirely of the two payments hereinbefore mentioned) to the $17,500 note due on the 8th of January, and on Monday, January 11th, did likewise in respect to the note for $5,000 due that day; the President of the Bank having concluded from the information received on the 8th that it was desirable to take this action.

On May 6, 1937, almost four months later, creditors filed a petition to have the Company's assets distributed in accordance with the Bankruptcy Act. Thereafter, the Company was adjudicated bankrupt and a Trustee appointed.

In this action the Trustee sought to recover from the Bank $21,693.75, that portion of the Company's deposits which the Bank applied to retire the two notes referred to. The theory of the Trustee's action is that the payment thereby realized by the Bank constitutes a voidable preference under § 60, sub. b of the Bankruptcy Act,² not a permitted set off transaction.³ Under the Act and the decisions construing it, the Trustee's action could succeed only if (1) either the Company or the Bank, at the time of the deposits, intended them to operate as a payment of the notes, not as an ordinary deposit subject to withdrawal;⁴and (2) the Company was at that time insolvent in fact;⁵and (3) the Bank had reasonable cause to believe, at the time of the deposits, that payment of the notes would effect a preference, i. e., reasonable cause to believe the Company was then insolvent in the bankruptcy sense.⁶ On trial of the action and after all evidence was in, a motion by the defendant Bank for a directed verdict presented the question whether an issue had been made for the jury in respect to each of these three factors. The District Court indicated an opinion that a jury question had been made out on the issue of the Company's insolvency in fact at the time of the deposits, but held otherwise in respect to issues (1) and (3) and directed a verdict for the Bank. From that judgment the Trustee (appellant herein) appeals.

Although on this appeal the controversy between the parties ranges over the entire front, we find it necessary to consider only the question whether a jury issue had been made out in respect to the third factor. The appellant concedes that, if the record will not support a finding that, at the time of the deposits in question, the Bank had reasonable cause to believe the Company insolvent, then the District Court's judgment directing a verdict against him, must be affirmed.

The nature of reasonable cause to believe a debtor insolvent was authoritatively defined by the Supreme Court in Grant v. First National Bank⁷ as follows:

"Some confusion exists in the cases as to the meaning of the phrase, `having reasonable cause to believe such a person is insolvent.' Dicta are not wanting which assume that it has the same meaning as if it had read, `having reasonable cause to suspect such a person is insolvent.' But the two phrases are distinct in meaning and effect. It is not enough that a creditor has some cause to suspect the insolvency of his debtor; but he must have such a knowledge of facts as to induce a reasonable belief of his debtor's insolvency, in order to invalidate a security taken for his debt. To make mere suspicion a ground of nullity in such a case would render the business transactions of the community altogether too insecure. It was never the intention of the framers of the act to establish any such rule. A man may have many grounds of suspicion that his debtor is in failing circumstances, and yet have no cause for a well-grounded belief of the fact. He may be unwilling to trust him further; he may feel anxious about his claim, and have a strong desire to secure it, — and yet such belief as the act requires may be wanting. Obtaining additional security, or receiving payment of a debt, under such circumstances is not prohibited by the law. Receiving payment is put in the same category, in the section referred to, as receiving security. Hundreds of men constantly continue to make payments up to the very eve of their failure, which it would be very unjust and disastrous to set aside. And yet this could be done in a large proportion of cases if mere grounds of suspicion of their solvency were sufficient for the purpose.

"The debtor is often buoyed up by the hope of being able to get through with his difficulties long after his case is in fact desperate; and his creditors, if they know any thing of his embarrassments, either participate in the same feeling, or at least are willing to think that there is a possibility of his succeeding. To overhaul and set aside all his transactions with his creditors, made under such circumstances, because there may exist some grounds of suspicion of his inability to carry himself through, would make the bankrupt law an engine of oppression and injustice. It would, in fact, have the effect of producing bankruptcy in many cases where it might otherwise be avoided.

"Hence the act, very wisely, as we think, instead of making a payment or a security void for a mere suspicion of the debtor's insolvency, requires, for that purpose, that his creditor should have some reasonable cause to believe him insolvent. He must have a knowledge of some fact or facts calculated to produce such a belief in the mind of an ordinarily intelligent man." (Italics supplied)⁸.

Since the date of its decision the rule laid down in the Grant case has been followed consistently⁹ and there is no doubt but that it represents the law on this point.

We come then to the question whether the record would support a finding that the Bank had knowledge of some fact or facts which in the mind of a reasonably intelligent man would produce, not a mere suspicion, but a well founded belief that the Company was insolvent at the time of the deposits. In this inquiry decisions in other cases on different facts are of no assistance¹⁰ and the authorities relied on by the appellant¹¹ are all distinguishable on that ground. Determination of the issue simply requires an analysis of evidence in the record on this point.

As stated previously, when the Company secured its first loan, the Bank required it to give certain information respecting its financial condition. This information, checked by the Bank in an independent investigation, revealed that the Company's assets far exceeded its liabilities. Subsequent periodic reports reaffirmed this condition. The latter part of August or the...