First Nat. Bank v. Abbott

• Decision Date: 24 November 1908
• Docket Number: 2,776.
• Citation: 165 F. 852
• Parties: FIRST NAT. BANK OF PHILADELPHIA v. ABBOTT.
• Court: U.S. Court of Appeals — Eighth Circuit

165 F. 852

FIRST NAT. BANK OF PHILADELPHIA v. ABBOTT.

No. 2,776.

United States Court of Appeals, Eighth Circuit.

November 24, 1908

Syllabus by the Court

A proceeding in bankruptcy is a proceeding in equity, and the taking of testimony therein and the review by appeals of hearings therein are governed by the same practice as they are in suits in equity, except where otherwise specified.

A referee or the District Court taking testimony in a controversy or hearing in bankruptcy is required by that practice to take, record, and, in case of an appeal, to return to the appellate court, all the evidence offered by either party to the controversy, that which is held by them to be incompetent, irrelevant, or immaterial as well as that which they deem admissible, to the end that, if the appellate court is of the opinion that evidence rejected should have been received, it may consider it, render a final decree, and conclude the litigation without remanding the suit to procure the excluded evidence.

From the general rule that all evidence offered should be received, the evidence of a privileged witness, privileged evidence, and evidence which clearly and affirmatively appears to be so incompetent, irrelevant, or immaterial that it would be an abuse of the process or power of the court to compel its production or permit its introduction, are excepted.

Rulings of a referee in bankruptcy or of a District Court excluding evidence not taken and returned to the appellate court are not reviewable there.

The remedy for a refusal of a referee to take and preserve such evidence is an application to the District Court, and failing there, to the Circuit Court of Appeals, for an order that it be taken and preserved.

Appeal and review in bankruptcy cases, see note to In re Eggert, 43 C.C.A. 9.)

The temporary failure of a debtor to discharge his obligations promptly when they fall due is not in itself sufficient to prove that a creditor who is aware of such a default has reasonable cause to believe that it was intended to give a preference by means of a transfer which he obtains.

Mere grounds of suspicion that a debtor is insolvent, or that it is intended to create a preference by a transfer, are insufficient to establish the fact that the creditor who receives it has reasonable cause to believe that a preference was intended thereby. There must be substantial evidence of reasonable grounds for such a belief.

Where the referee and the District Court have considered conflicting evidence and made a finding or decree thereon that finding is presumptively right, and it should not be reversed unless it clearly appears that they have fallen into some error of law or have made some serious mistake of fact.

In April, 1905, a corporation of the highest credit, dominated by its president, a man of the best reputation, both recommended by reliable bankers of St. Louis, where they conducted a large mercantile business, stated to a Philadelphia bank that it had assets worth $1,316,841.94 and owed $429,904.48, and borrowed of that bank $100,000 gave it 20 notes of $5,000, each payable in October, 1905, and agreed to keep a balance of $20,000 in the bank. By June 12, 1905, it had drawn out the $100,000, and had persisted in kiting by depositing its checks on a St. Louis bank in the Philadelphia bank from day to day to the amount in the aggregate of $111,000, and simultaneously drawing out the amounts so deposited daily by means of its checks on the Philadelphia bank which it had deposited in a St. Louis bank, until the Philadelphia bank had positively refused to permit the kiting to continue longer. The corporation promised in June to restore its deposit to the $20,000, but failed to do so, and from July 1, 1905, kept less than $10 in its deposit. In October it paid $30,000 of the $100,000 it owed, and failed to pay $70,000 thereof. Its notes and checks went to protest about the middle of October. The bank refused to accept its common stock as security for its claim, and demanded, and, on November 2, 1905, secured an assignment of, some of its open accounts, upon a statement which it made that it was not its habit to notify debtors of such assignments, and it left the accounts with the corporation for collection. The officers and agents of the Philadelphia bank testified that they did not believe that the assignment was intended as a preference or that the debtor was insolvent.

Held. The evidence in this case does not so clearly show that the referee and the District Court were mistaken in their finding that the bank had reasonable cause to believe on November 2, 1905, that it was intended to give a preference by the assignment it secured, that their conclusion should be reversed.

P Taylor Bryan (William Meade Fletcher, Harvey L. Christie, and Byron F. Babbitt, on the brief), for appellant.

Lee W. Grant and B. Schnurmacher (Leo Rassieur, on the brief), for appellee.

Before SANBORN and VAN DEVANTER, Circuit Judges, and AMIDON, District judge.

SANBORN Circuit Judge.

This is an appeal from a decree of the District Court which affirmed an order of the referee in bankruptcy to the effect that the claim of the First National Bank of Philadelphia against the estate of the Tennent Shoe Company be expunged unless the bank surrendered the security which it had obtained within four months of the filing of the petition in bankruptcy by an assignment of certain accounts owing to the shoe company. This assignment was made on November 2, 1905. On November 8, 1905, the shoe company gave a letter to the bank in which it stated that its assets were of the value of $1,247,881, and that its liabilities amounted to $405,000. The confidential bookkeeper of the shoe company had testified that the company carried on its books and in its statements as assets items amounting to several hundreds of thousands of dollars which were either worthless or were liabilities, and that the letter of November 8, 1905, with the exception of the signature, was in his handwriting.

The appellant specifies as error the fact that the referee sustained objections to queries put to this witness whether or not the statements in that letter were true, and whether or not the fact was ever communicated to any one prior to December, 1905, that these fictitious items were carried among the alleged assets. But the decree below cannot be reversed on account of these rulings, because the facts that the statements in the letter were not true, that the bookkeeper knew that fact, and that the presence of the fictitious assets in the statements was not communicated to the bank, or any of its agents, are sufficiently established by other evidence in the record, and must have been taken as true in the court below, and will be so taken in this court, so that these rulings, if they were erroneous, could not have prejudiced the bank, and also because the questions they present are not reviewable here in the present state of this record.

A proceeding in bankruptcy is a proceeding in equity, and on an appeal to this court, or to the Supreme Court, the decisive issue is not whether there was an error in the admission or exclusion of evidence, but whether or not all the competent and relevant evidence presented to the appellate court sustains the decree. The established practice in the federal courts in equity is that examiners, masters, and the Circuit Courts must, under rule No. 67 in equity, take, record, and in case of an appeal, return to the appellate court, all the evidence offered by either party, that which was held to be incompetent or immaterial as well as that which they deemed competent and relevant, to the end that, if the appellate court is of the opinion that evidence rejected should have been received, it may consider it, render a final decree, and thus conclude the litigation without remanding the suit to procure the excluded evidence. If evidence is objected to and ruled out, it must nevertheless be written down and preserved in the record subject to the objections, or the ruling cannot be considered in the appellate court. From the general rule that all evidence offered must be taken and preserved, the evidence of a privileged witness, evidence plainly privileged and evidence which clearly and affirmatively appears to be so incompetent, irrelevant, or immaterial that it would be an abuse of the process or power of the court to compel its production or to permit its introduction, are excepted. Blease v. Garlington, 92 U.S. 1, 7, 8, 23 L.Ed. 521; Dowagiac Mfg. Co. v. Lochren, 143 F. 211, 213, 214, 74 C.C.A. 341, 343, 344, and cases there cited. Referees, other officers taking testimony, and the District Court are governed by the same rule of practice in the taking of evidence and the hearing of controversies in bankruptcy, where the reason for the rule is much stronger than in ordinary suits in equity, because many of the orders and decrees in bankruptcy are reviewable first in the District Court and again in the Court of Appeals, and the delays would be intolerable if it were necessary for each court to remand for further testimony whenever it found that excluded evidence should have been received. The bankruptcy act of 1898, c. 541, sec. 24a, 30 Stat. 553 (U.S. Comp. St. 1901, p. 3431), provides that appeals as in equity cases may be taken in bankruptcy proceedings, and the Supreme Court, in prescribing the method of taking testimony, substantially followed the provisions of rule 67 in equity. General Orders in Bankruptcy No. 22, 89 F. x, 32 C.C.A. xxv. The last sentence of this order shows clearly that it was the purpose of that court to assimilate the practice in bankruptcy to that in equity in this respect: to require all evidence fairly offered, admissible, and...