Dabney v. Chase Nat. Bank of City of New York

• Decision Date: 08 January 1953
• Docket Number: No. 115,Docket 22129.,115
• Citation: 201 F.2d 635
• Parties: DABNEY v. CHASE NAT. BANK OF CITY OF NEW YORK.
• Court: U.S. Court of Appeals — Second Circuit

201 F.2d 635 (1953)

DABNEY v. CHASE NAT. BANK OF CITY OF NEW YORK.

No. 115, Docket 22129.

United States Court of Appeals Second Circuit.

Submitted May 29, 1952.

Decided January 8, 1953.

John A. Anderson, New York City, of counsel, for appellant.

Lewis M. Dabney, Jr., pro se.

A. Donald MacKinnon, New York City, Milbank, Tweed, Hope & Hadley, New York City (Rebecca M. Cutler and William E. Jackson, New York City, of counsel), for Chase National Bank of the City of New York, defendant-appellee.

Before SWAN, Chief Judge, and L. HAND and CLARK, Circuit Judges.

L. HAND, Circuit Judge.

When this case was before us after trial — 196 F.2d 668 — we held that there were two questions on which we wished the parties to present arguments, because they had not been discussed. First: for what part of the payment of $4,000,000, collected in the spring of 1932, must the bank account? Second (really one aspect of the first): who of the bondholders were entitled to share in the payment? When the case had been before us on the first appeal,¹ we had held that the second and fourth counts of the complaint stated valid claims; and on the second appeal we held that, although the plaintiff had not proved the case stated in the fourth count, he had proved that stated in the second. The court was divided on both points: Judge CLARK and I concurring as to the second count; and Judge SWAN and I as to the fourth. Regarding the second count we had said on the first appeal, 137 F.2d at page 801: "Even though the absence of a res may make the word `trustee' inapposite, Chase was at least an agent equally obligated to refrain from competing with its principals, the debenture-holders. There was certainly a fiduciary relation to which the obligation generally applicable to trustees would apply." Judge Conger had held that "Ageco" was insolvent in 1932, when the loan was paid, but that the bank did not have such notice as was required to make the payment a voidable preference in bankruptcy; but there remained the question whether, notwithstanding the absence of such notice, the bank's collection of the loan was a breach of its fiduciary duty; and we held (1.) that, it was, provided the bank had notice in 1932 that there was a serious likelihood that "Ageco" would not be able to pay the bonds at their maturity; and (2.) that it did have such notice. We then held that it was not necessary to decide whether the payment of $4,000,000 in 1932 had resulted in lessening the dividend in reorganization of the bondholders in 1940, because if it had, their loss would be the same as the bank's gain, and the bank, like any other fiduciary, was accountable for any gain that came to it as a result of its breach of duty.²

That duty was not to increase the risk that the bonds might not be paid at maturity by collecting the loan at a time when "Ageco" was in danger of insolvency, although the bank would have been free to force a payment of the loan at any time when it did not know "Ageco's" solvency to be doubtful. The indenture had given it the right to lend to "Ageco," and that implied the right to collect; but it was not free to exercise that right if in doing so it brought itself into competition with its beneficiaries. On the other hand, since the right to collect was tolled only when its exercise did compete with the bondholders we might perhaps have held that the bank's liability for collecting in 1932 would have ended, if at any time between then and 1940 there had been a period during which the risk ceased, even though it later reappeared. Since the bank did not show that there had been any such period, we need not decide that question; and we shall therefore dispose of the appeal on the assumption that it was under a continuous duty to the bondholders until 1940, when "Ageco's" assets were distributed. The parties differ as to the proper computation of the gain that the bank derived from this default: i. e. whether it should be the whole difference between the sum collected — $4,000,000 — and the bank's dividend in reorganization; or only that fraction of this difference that the bonds, outstanding in 1940, bore to all "Ageco's" indebtedness at that time (including not only the bonds but the loan). The plaintiff's position may be most forcefully stated as follows. Since it was impossible in 1932 to know by how much the sum withdrawn would lessen the bondholders' dividend, it was not lawful for the bank to collect any part of the loan, and the gain from this breach of duty was the whole difference between $4,000,000 and the bank's dividend.

This misconceives the nature of the remedy, when the beneficiary seeks to recover the fiduciary's gain. It is granted on the theory that the beneficiary may adopt the fiduciary's transaction as though it had been made on his behalf. In the case at bar the sum collected upon its receipt by the bank in 1932 became subject in its hands to a constructive trust; but it was a trust in which the bondholders had no immediate, but only a future and contingent, interest: i. e. that it should be available in the event of "Ageco's" insolvency to bring the bondholders' dividend up to the amount it would have been, had the bank not collected the loan. Whatever part of the payment that addition turned out to be was all that the bank would be obliged to repay, for it was as free to keep the remainder in 1940 as it had been free to collect it in 1932. The fact that it had all along been impossible to forecast how great this addition would be, did not enlarge the bondholders' interest in the payment, or give them the power to adopt as their own the collection of any part of it that could never be theirs. It is another matter whether the interest, contingent as it was, would be enough to allow the bondholders to "avoid" the whole payment (of which more in a moment). The plaintiff answers that this conclusion runs counter to McCandless v. Furlaud, 296 U.S. 140, 56 S.Ct. 41, 80 L.Ed. 121, but he mistakes the scope of that decision. It was no more than a holding that the consent of all the shareholders of a corporation to a series of steps in a fraudulent flotation of its securities, was no defence to an action by its receiver against the promoters of the scheme. No one questioned that the flotation had been a fraud on those to whom the securities were issued; but the defendants' argument was that the receiver had no standing to recover on behalf of the victims, because he could speak only in the name of the corporation, and the corporation by its shareholders had consented to the transactions at their inception. In the case at bar the only persons against whom any wrong was committed were the bondholders, and we are holding that the reorganization trustee may enforce all remedies to which they would be entitled in any action or proceeding. For the foregoing reasons we hold that, unless there be something in the Bankruptcy Act to the contrary, the measure of the bank's gain is the fraction we have described of the difference between $4,000,000 and the bank's dividend in reorganization.

There remains the plaintiff's other argument that, as the claim arises in bankruptcy Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, controls, the effect of which was that § 70(e) of the Bankruptcy Act made the "transfer" in 1932 — i. e., "Ageco's" payment of the loan, — "voidable" in toto, because it was "voidable" by the bondholders. In Moore v. Bay the bankrupt, a corporation, had executed a chattel mortgage in California where the statute required it to be filed within seven days. The mortgagee had delayed filing it for some time beyond the limit, so that the mortgage was confessedly invalid as to those creditors whose claims had arisen before the filing date; but the mortgagee insisted that it was good against those whose debts had arisen later. The Court of Appeals, 9 Cir., 45 F.2d 449, so decided; but the Supreme Court held that § 70(e)³ made the mortgage invalid as to all the creditors, if it was invalid as to any one of them. The section has been amended since then, but its substance is still the same, and it now declares that a "transfer made * * * by * * * a bankrupt * * * which, under any Federal or State law * * * is fraudulent as against or voidable for any other reason by any creditor * * * shall be null and void as against the trustee"; and that every "such transfer * * * shall be avoided by the trustee for the benefit of the estate." There are two answers to the argument that this interpretation of the section governs the case at bar. First, even verbally, the facts do not fit the text; and second, the purpose of the section does not extend to "transfers," to "avoid" which a creditor must resort to a right, acquired by virtue of a transaction between himself and the transferee, and not between himself and the bankrupt.

In the case at bar no creditor except the bondholders could have challenged the payment, and the answer to the first question depends upon whether they could have "avoided" it "under any Federal or State law." We think that they could not have done so. As we have said, the bank was always entitled to the immediate payment of that part on the sum collected that would not be distributed to the bondholders in insolvency; and incidentally that was certain to be very substantial. On the other hand it is quite true that this part of the payment was not only indeterminate in 1932, but was certain to remain so until either the bonds were paid in full, or "Ageco" became insolvent. Moreover, it is of course a well recognized doctrine, especially in equity, that a court will ordinarily throw upon one who has committed a wrong, the burden of answering any doubts as to the measure of restitution.⁴ Thus, at first blush it might appear that the bondholders could have successfully invoked this principle, and thus have "avoided" the whole payment at any time after 1932. On the other hand, like any other equitable remedy, "...