First National Bank of Portland v. Dudley

Decision Date13 April 1956
Docket NumberNo. 14837.,14837.
Citation231 F.2d 396
PartiesThe FIRST NATIONAL BANK OF PORTLAND, a National Banking Association, Appellant, v. Frank A. DUDLEY, Trustee in Bankruptcy of the Estate of Northwest Variety Wholesale, Inc., Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

COPYRIGHT MATERIAL OMITTED

Pendergrass, Spackman & Bullivant, V. V. Pendergrass, R. R. Bullivant, Walter H. Pendergrass, Portland, Or., for appellant.

Edward A. Boyrie, Portland, Or., for appellee.

Before POPE and LEMMON, Circuit Judges, and MATHES, District Judge.

MATHES, District Judge.

The First National Bank of Portland prosecutes this appeal from an order of the District Court confirming an order made by the Referee in Bankruptcy. Bankruptcy Act, §§ 2, sub. a(10), 24, 25, 39, 11 U.S.C.A. §§ 11, sub. a(10), 47, 48, 67.

The Referee's order, following a hearing on objections filed by the trustee, disallowed appellant bank's claim against the bankrupt estate for a balance of $8,184.19 remaining unpaid on the promissory note of the bankrupt, unless the bank should surrender and pay over to the trustee, appellee here, the sum of $2,889.14 "appropriated * * * from the bank account of the bankrupt" by setting-off as a credit to the bank's note the entire balance of the bankrupt's account on July 14, 1953, the day following bankruptcy.

Subject to exceptions not applicable here, § 68, sub. a of the Bankruptcy Act provides that: "In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid." 11 U.S. C.A. § 108, sub. a.

Although the language appears to be mandatory, the right of set-off under § 68, sub. a is held to be permissive only, since the Bankruptcy Court, "in the exercise of the jurisdiction conferred * * * by the act, * * * applies the principles and rules of equity jurisprudence", Pepper v. Litton, 1939, 308 U. S. 295, 304, 60 S.Ct. 238, 244, 84 L. Ed. 281, and equity will intervene, where circumstances of equitable cognizance so require, to cut off the legal right of set-off. Cumberland Glass Mfg. Co. v. De Witt, 1915, 237 U.S. 447, 455, 35 S.Ct. 636, 59 L.Ed. 1042; Prudential Ins. Co. of America v. Nelson, 6 Cir., 101 F.2d 441, 443, certiorari denied, 1939, 308 U.S. 583, 60 S.Ct. 106, 84 L.Ed. 489; Union Bank & Trust Co. v. Loble, 9 Cir., 20 F.2d 124, certiorari denied, 1927, 275 U.S. 545, 48 S.Ct. 83, 72 L. Ed. 417; 4 Collier, Bankruptcy 710 (14th ed. 1942).

In the words of Cumberland Glass Mfg. Co. v. De Witt, supra: "The provision is permissive rather than mandatory * * *. The matter is placed within the control of the bankruptcy court, which exercises its discretion in these cases upon the general principles of equity." 237 U.S. at page 455, 35 S.Ct. at page 639.

It may be stated then as a general proposition that, absent circumstances rendering it inequitable so to do, a bank ordinarily may, preceding or following bankruptcy, set-off any claim, provable in character and fixed as to amount, Bankruptcy Act, § 63, sub. a, 11 U.S.C.A. § 103, sub. a, against such credit balance as the bankrupt may then have on deposit with the bank. Continental & Commercial Trust & Savings Bank v. Chicago, 1913, 229 U.S. 435, 33 S.Ct. 829, 57 L.Ed. 1268; Studley v. Boylston National Bank, 1913, 229 U.S. 523, 33 S.Ct. 806, 57 L.Ed. 1313; New York County National Bank v. Massey, 1904, 192 U.S. 138, 24 S.Ct. 199, 48 L.Ed. 380; Ingram v. Bank of Cottage Grove, 9 Cir., 1928, 29 F.2d 86.

In the proceedings at bar the Referee concluded that appellant bank waived its right of set-off; also that "the bank account of the bankrupt as it existed at the time of the commencement of the within bankruptcy proceedings was created under such circumstances, with the cooperation of the bank and the bankrupt, as to so far impress upon it the character of a trust fund, that the bank should be estopped to assert a lien thereon or the right of set off."

Some detail in recital is requisite to knowledge of the facts upon which the Referee rested his conclusions, and to a determination whether the Bankruptcy Court acted "upon the general principles of equity" within the limits of discretion under § 68, sub. a of the Act.

From uncontradicted evidence and the findings made by the Referee the following facts appear: In 1946 the bankrupt, Northwest Variety Wholesale, Inc., opened with appellant bank "a general commercial account in which unrestricted deposits were made subject to withdrawal by check in the ordinary course of business. This account was in existence at the time of the creation of the loan upon which the claim of the bank is based and continued in existence without change, except as to the amount thereof, to and including the date of the exercise by said Bank of its asserted right of off-set."

The bankrupt was a wholesaler of so-called variety goods. Early in 1952, upon the advice of a "national firm of business consultants", the bankrupt "changed its operation from strictly a co-operative to more or less of a strictly wholesale variety stock."

The result was that "in the fall of 1952 the corporation found itself with a tremendous inventory, and of course the corresponding bills, which made it impossible to pay the bills." In November, 1952, the total indebtedness was "$85,000 owing to approximately 158 creditors. But offsetting that was about $135,000 or $140,000 worth of inventory."

The inventory "was all merchantable, but it did represent items, for instance, that could only be sold at Christmastime, other items could only be sold the following year at, say, Valentine's Day and Mother's Day and the various holidays along the line, and * * * a big school supply which wouldn't be able to be sold until the following fall."

On October 11, 1952, the bankrupt had executed a 30-day promissory note for $22,000 in favor of appellant bank, and at all times thereafter the bank was the largest creditor.

To quote from the Referee's findings: "That during the month of November, 1952, the bankrupt became unable to meet its obligations in the regular course of business as they became due, and by its president and its attorney advised said bank that it found itself in this condition, but that it had a stock of merchandise which could be sold to advantage over a period of time so as to liquidate the indebtedness owing to the bankrupt corporation; that the bankrupt proposed to said bank that if the creditors, including said bank, would refrain from seeking immediate payment of their respective accounts in full, the bankrupt would proceed to liquidate its inventory over a period of twelve months time and would pay to the bank, as well as to other creditors, a quarterly payment of twenty-five per cent of the indebtedness owing to the bank and to such creditors, the first of said payments to be made on January 15th, 1953.

"That the bank proposed a modification in said plan whereby, instead of quarterly payments of twenty-five per cent over a twelve months period of time, monthly payments of ten per cent would be made to creditors commencing with the month of January, 1953.

"That as so modified, the bank agreed that the plan was a feasible one, which should enable the bankrupt to work out of its financial difficulties, and that the bank would go along with the bankrupt on the plan and refrain from pressing for immediate payment in full of the indebtedness due it, providing that the monthly payments of ten per cent were made.

"That the bankrupt advised its other creditors of said plan and advised a number of said creditors of the approval of said plan by the bank and the participation of the bank therein, and obtained the participation of its other creditors in said plan, with the result that the bankrupt was permitted to continue in business and proceeded to liquidate its inventory in accordance with the plan, and to make the ten per cent payments monthly to each of its creditors during the months of January, February, March, April and May, 1953."

The bank "received and accepted monthly payments of ten per cent of the principal of its note together with accruing interest in full during said five months * * *, and reduced the amount of said note to $11,000.00; that the other creditors of the bankrupt received and accepted monthly payments of ten per cent of their accounts, reducing their respective claims accordingly."

There is no suggestion that the ordinary course of business was not followed, so the presumption is that all proceeds from sales of inventory were, as before, deposited in appellant bank. See: Ore.Rev.Stat. § 41.360(20) and (33) (1953); 9 Wigmore, Evidence §§ 2499, 2530 (3d ed. 1940). All ten per cent "dividend" checks to creditors were cleared through the account with appellant bank. In short, during all of this period up through the month of May, 1953, the bank was well advised on the progress of the extension plan.

In the words of the bankrupt's attorney, qua witness: "In June actually what the situation was, we had anticipated that the current business would continue at a faster rate than actually developed. We had anticipated when the corporation went back more or less to the old way of doing business about the first of December, that is, on a co-operative basis, and judging from the past experience of the co-operative, we had anticipated that same business would come back into the corporation again. But it didn't, so there wasn't enough current business to keep the organization going, and along about what would be the sixth payment in June there wasn't enough money to make the sixth ten per cent payment.

"At that time we called a meeting of the stockholders to inquire whether the stockholders thought they should continue, whether they wanted to keep the corporation going on a co-operative basis, but by that time they were discouraged and decided the...

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