Fechheimer v. Baum

• Decision Date: 03 January 1889
• Citation: 37 F. 167
• Parties: FECHHEIMER et al. v. BAUM et al.
• Court: U.S. District Court — Southern District of Georgia

37 F. 167

FECHHEIMER et al. v. BAUM et al.

United States Circuit Court, S.D. Georgia, Western Division.

January 3, 1889

(Syllabus by the Court.)

The courts of the United States sitting in equity may administer in suits of which they have jurisdiction, equitable rights peculiar to the laws of a state where the courts are held.

The fact that the local statute provides that a creditor of an insolvent trader, or firm of traders, whose debt is mature unpaid, demanded, and payment refused, may ask for a receiver, is an exception to the rule making the existence of a lien a prerequisite to such an application.

A person not intending to pay, by inducing one to sell him goods on credit through the fraudulent concealment of his insolvency, is guilty of a fraud which entitles the vendor to disaffirm the contract, if no innocent third party has acquired an interest in the property.^[1]

Where a firm of traders in May make a statement to a commercial news agency, (Bradstreet's,) showing entire solvency, which statement is intended to be circulated among merchants selling goods upon credit, and which states that there are no liens or mortgages upon their assets, and that they give no security for borrowed money, except farmers' notes as collateral, and in December it appears that they are in debt more than $150,000, and utterly insolvent, and that at the time of their statements they had made a written promise to execute mortgages to a favored creditor upon their entire assets, which promise was withheld from the news agency, and that their entire stock was subsequently conveyed by mortgage to such favored creditor, the entire transaction is fraudulent as to creditors who gave them credit on the faith of said statement.

If the traders were insolvent at the time of their statement to Bradstreet, their statement of complete solvency, made 'willfully with the intent to deceive, or recklessly without knowledge,' is fraudulent, under the law of Georgia, as to parties who were misled thereby.

The facts stated by the bill and affidavits make this a proper case for the chancellor to grant the injunction sought, and to appoint a receiver.

The bill before the chancellor was filed by the plaintiffs residents and citizens of Ohio, against Baum & Bro., a firm doing business at Toomsboro, Irwington, and Dublin, in this district, to assert the right to an injunction and the appointment of a receiver given by the law of Georgia. Code Sec. 3149a. This section provides:

'In case any corporation, not municipal, or any trader or firm of traders, shall fail to pay at maturity any one or more matured debts, payment of which has been properly demanded of such debtor and by him refused, and shall be insolvent, it shall be in the power of the court of equity, under a creditors' bill, to which one or more of the creditors who have matured debts unpaid shall be necessary parties, to proceed to collect the assets, real and personal, including choses in action and money, and appropriate the same to the creditors of such traders, firm of traders, or corporation.'

The averments of the bill made and sworn to conform to the requirements of the statute in all respects, and so far as they indicate the existence of matured debts due by the defendants to the plaintiffs, the demand for payment, its refusal, and the insolvency of the defendants, the averments are not denied. In addition, the bill alleges other facts not less important to the jurisdiction in equity. They are that on May 21, 1888, the defendants, Baum & Bro., made a statement to Bradstreet's Mercantile Agency, which showed a condition of prosperous solvency upon their part, which statement is appended as an exhibit to the bill; that plaintiff, in the usual course of business, had knowledge of that statement, believed it to be true, and knew this before their merchandise was sold to the defendants; that the defendants owe $160,000; have made many fraudulent assignments and preferences; that some of these are given to favored creditors, upon the goods of the plaintiffs not yet paid for; that the plaintiffs' debts were created for a large stock of clothing, part of which is yet in possession of the defendants; that the purchase was made by the defendants with the deliberate intention not to pay therefor, and with no reasonable expectation that the defendants would be able to pay; that the sales are void, and that the title did not pass; that the statement made to the Bradstreet's Mercantile Agency as to the standing and condition of the firm was made with intent to deceive the public, and especially the plaintiffs, and was a part of a scheme to defraud creditors who would extend credit; that the fraudulent preferences amount to $70,000, which is larger than the annual amount handled in business by the defendants.

The prayer is for an injunction and receiver, and that goods purchased by defendants from plaintiffs be kept separate for the benefit of plaintiffs, and for a general judgment, and for general relief. The temporary injunction was granted upon consideration of plaintiffs' bill, and thereupon plaintiffs filed an amendment thereto. This prayed that H. M. Comer & Co., a firm of cotton factors of this district, be made parties; that the preferences to Comer & Co. are void, (they consist of certain mortgages to secure an alleged indebtedness of $35,000, given upon stock worth $43,000;) that in addition to these mortgages the defendants have transferred and assigned to H. M. Comer & Co. notes and accounts in a sum largely in excess of Comer's demand; that on August 22d these accounts were worth $50,000, and plaintiffs charge on information and belief that these transferred choses in action have been increased by other transfers to $75,000; that since the mortgage and preferences were given, the defendants, Baum & Bro., have paid to Comer & Co. $18,000, which reduces their demand to $17,000, and yet Comer & Co. hold as collateral and otherwise in mortgages on real and personal property the full sum of $100,000 to secure this debt. This was stated on the hearing, without objection, to be $24,600, and the chancellor, for the present, assumes that to be correct.

The bill alleges that the transactions between Comer & Co. and the defendants were the result of a fraudulent confederacy to hinder and delay creditors, and to compel them to accept a small pittance in full satisfaction of large debts; that the demands of Comer & Co. should not be paid by the proceeds arising from the sale of the merchandise of plaintiffs and other creditors, not yet paid for; that Comer & Co. had actual notice of the defendants insolvent condition at the time of certain payments made to them from such proceeds. The amendment further alleges that, prior to the insolvency of the defendants, or at some other time, Comer & Co. obtained from the defendants an agreement in writing that when the defendants should become weak or insolvent that they would execute and make to Comer & Co. a mortgage covering their entire property, and should assign to them all of their notes, accounts, and choses in action; that said mortgages and preferences were given in pursuance of said agreement; that Comer & Co. permitted the defendants to retain possession of the notes and accounts and choses in action transferred to him; that the large amount of assets in the hands of Comer & Co., over and above their lawful demand, will be sacrificed to the injury of plaintiffs; that the defendants bought a large stock of goods on credit, with the intention not to pay for them, and to defraud creditors. The prayer is that Comer & Co. be required to produce the said agreement on the hearing, and that they be enjoined from proceeding to foreclose the mortgage or mortgages, and that they be enjoined from collecting the notes and accounts, or from any way interfering with the assets of the defendants, and that a receiver be appointed to take charge of all such assets for the benefit of the creditors. The bill expressly waives discovery.

In reply to the motion for injunction, etc., the defendants Baum & Bro. deny, in their answers, that plaintiffs' debt was contracted after the financial statement was made; that they gave the statement of the 21st of May, yielding to the solicitation of the Bradstreet Company; that there were not mortgages or liens at the time the statement was made; that the statement appended to the bill itself is erroneous; that their dealings have been honorable and successful up to the time of this failure; that their failure is a thoroughly honest failure; that they have not made any preference upon which suspicion or doubt can be cast as to its entire good faith; that their creditors have given uniform evidence of their entire and unabated confidence in the defendants' integrity; that they have paid large amounts to their creditors, and have drawn out nothing from their business except for the necessary support of their families; that the mortgages were given to secure bona fide debts; and that, if a receiver is appointed, the loss in winding up the business will be so great that the creditors will get nothing.

H. M Comer makes answer by affidavit. He states that on the 10th day of March, 1888, he took the agreement to the court shown, which was referred to in the bill. This had been done every year previously. It was taken in entire good faith, to protect the advances that deponent made. He gave the creditors knowledge of it on the 3d of December, and never attempted to conceal it. He denies utterly fraud and confederacy. That in his preferences defendants reserved no right or benefit to themselves. He never had any reason to suspect fraud on the part of the defendants. That in the spring and summer of 1888, before he knew defend...