Florida Trailer and Equipment Company v. Deal

• Decision Date: 23 November 1960
• Docket Number: No. 18262.,18262.
• Parties: FLORIDA TRAILER AND EQUIPMENT COMPANY, Appellant, v. Wiley R. DEAL, as Trustee in Bankruptcy of the Bankrupt, Farley Taylor, d/b/a Taylor Bodies, and the City National Bank of Dothan, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

284 F.2d 567 (1960)

FLORIDA TRAILER AND EQUIPMENT COMPANY, Appellant, v. Wiley R. DEAL, as Trustee in Bankruptcy of the Bankrupt, Farley Taylor, d/b/a Taylor Bodies, and the City National Bank of Dothan, Appellees.

No. 18262.

United States Court of Appeals Fifth Circuit.

November 23, 1960.

Truman Hobbs, Montgomery, Ala., Douglas Brown, Ozark, Ala., Brown & Steagall, Henry B. Steagall, II, Ozark, Ala., Hugh R. Dowling, Jacksonville, Fla., for appellant.

J. Robert Ramsey, W. G. Hardwick, G. M. Harrison, Dothan, Ala., for appellees.

Before RIVES, Chief Judge, and BROWN and WISDOM, Circuit Judges.

BROWN, Circuit Judge.

This appeal really presents the question whether there was such an abuse of discretion in the Referee's approval of a proposed settlement that the District Court erred in not setting it aside. We emphasize really because the Objecting Creditor (now appellant) in the hearing before the Referee, on the petition of review in the District Court and again here in briefs and arguments, persists in treating the matter as though this were an appeal from a decision on the intrinsic merits in an initial adversary proceeding. The two are quite different.

This matter started as a formal application by the Trustee under § 27 of the Bankruptcy Act, 11 U.S.C.A. § 50,¹ for leave to settle all controversies (save one specifically excepted) between the Bankruptcy Estate and the City National Bank of Dothan, Alabama. The application recited that there was then pending in the same Federal District Court the Trustee's plenary suit against the Bank. The application annexed copies of that complaint which in turn incorporated a series of chattel mortgages by the Bankrupt to the Bank and assignments of installment sales, chattel mortgages presumably executed by purchasers of trucks or trailers from the Bankrupt. It set forth that within four months of bankruptcy the Bank received one payment in cash ($6,000) and took possession of specified vehicles on which it claimed to be the mortgagee or assignee under the chattel mortgages. The theory of the Trustee's plenary suit was that by failure of the Bankrupt properly to record the mortgages they were not perfected under applicable state law and were therefore deemed to have been perfected immediately before the filing of the involuntary bankruptcy petition. This, it was asserted, on familiar principles would constitute the payment of an antecedent debt and a voidable preference under § 60, 11 U.S.C.A. § 96, because of the known insolvency of the Bankrupt. The suit sought recovery of the cash payment and in effect cancellation of the mortgages and the restoration of the property (or payments) held by the Bank as a secured creditor. The Trustee's § 27 application sought approval of a tentative settlement reached between the Estate and the Bank. The substance of it was that the Bank would restore the $6,000 payment to the Bankrupt and the Bank would withdraw its claim as a secured creditor thus effectually restoring to the Estate the value of the accounts receivable (or the security) represented by the assigned chattel mortgage installment sales contracts.

On the filing of the application appropriate notice was given to all creditors. No objection was then or ever filed to its sufficiency under General Orders 28 and 33, 11 U.S.C.A. following section 53. 2 Collier, Bankruptcy § 27.03 at 1085 (14th ed. 1956). The Objecting Creditor (Florida Trailer and Equipment Company) filed a detailed objection which set out with great elaboration its contention that there was a substantial claim in favor of the Bankrupt Estate against the Bank for a voidable or recoverable preference growing out of the Bank's handling of cumulative daily overdrafts. Consequently, it urged, the proposed settlement ought not be approved.

As we stated in the beginning, the gauge was accepted on the basis of this objection. The battle lines were drawn on it. Almost all of the evidence bore solely on it. Whatever deficiency there might have been in the Trustee's § 27 application occasioned by the omission of a specific reference to any such potential claim was either waived, 2 Collier, Bankruptcy § 27.03 at 1088 (14th ed. 1956), or more properly the issues were expanded by implied consent. F.R. Civ.P. 15(b), 28 U.S.C.A.; General Order 37; Bixby v. First National Bank of Elwood, 7 Cir., 1958, 250 F.2d 713, certiorari denied 356 U.S. 958, 78 S.Ct. 994, 2 L.Ed.2d 1065. It is likewise immaterial that — as now urged by appellant — the Trustee's underlying plenary suit did not assert any such claim against the Bank since the implied evaluation of this asserted potential claim became the principal subject of the hearing. The right and power of the Trustee to settle subject to court approval extends to controversies and not merely those involved in pending suits. 2 Collier, Bankruptcy § 27.02 at 1083 (14th ed. 1956); Matter of Towers Magazines, Inc., D.C.Pa.1939, 27 F.Supp. 693.

As we are not dealing with the question of what judgment ought to have been rendered had the trial been in a plenary suit by the Trustee against the Bank to recover this asserted potential preference, we need not discuss the facts in any detail. The theory of the Objecting Creditor was that the Bank had for many months continuously allowed the Bankrupt to overdraw its checking account. The significance of this from a bankruptcy standpoint was that the subsequent deposits received to make good the overdrafts were in effect a preference payment of an antecedent debt to one having knowledge of insolvency.

The proof offered to sustain this was largely an accountant's analysis of the Bankrupt's checking account over a period of about six months. Neither the Bank's ledger nor the Bankrupt's bank statements showing daily withdrawals and deposits ever reflected an overdraft as such. But this analysis did show that on many days large amounts of checks would be presented to the Bank through clearing house channels for payment. Frequently the opening balance of the Bankrupt was nominal so the checks could not be honored. Checks in excess of the Bankrupt's balance would either be held or returned. The "held" checks² would simply be held from periods of one to two days, but not in excess of the time allowed under the Federal Reserve rules.³ The Bankrupt would then make a deposit of checks of third persons in sufficient amount to cover the "held" checks whereupon they would be accepted and honored. The Bank made a charge of $1.00 for each of the checks returned or held.

In an effort to establish that in effect the Bank was extending credit daily to the extent of these daily deficiencies ("overdrafts"), the Objecting Creditor also undertook to prove that to the Bank's knowledge the Bankrupt was engaged in check kiting with several others. It worked this way. The Bankrupt would obtain a check payable to Bankrupt from a third person and simultaneously give its check for like amount to the third person. The Bankrupt would then deposit the third party's check in his account with the Bank, and the Bank, treating that deposit as a reliable item, would pay checks drawn on Bankrupt's account then "held" because of inadequate balance. Frequently on presentation to the drawee banks of such third persons, the checks would be dishonored either under a "stop payment" order or for insufficient funds. Admittedly, as to three or four persons this operation was carried on extensively. The Bank's officers testified that they were not suspicious since at least two of these third-party drawers were represented by the Bankrupt to be its dealers whose "stop payment" orders resulted from rejection of the trailers ostensibly purchased by the deposited check. In other instances, where the Bank declined to treat checks offered for deposit as items against which immediate withdrawals of "held" checks could be made, the Bankrupt obtained checks of third persons which it deposited in the bank. Such third person would receive in exchange the checks which the Bank had insisted on taking as collection items. Indeed, the Objecting Creditor's claim against the Bankrupt resulted from its swapping its good checks thereafter deposited by Bankrupt for checks of third persons which were subsequently dishonored.

It was the Bank's theory that there is no overdraft until a check has been paid, that is, accepted. American Surety Co. of New York v. First National Bank, D.C.N.D.W.Va.1943, 50 F.Supp. 180, at page 183; State v. Jackson, 21 S.D. 494, 113 N.W. 880; 7 Am.Jur. 442. Holding a check for a limited time until the drawer's account would be sufficiently replenished by deposits to permit its being honored would not constitute payment. Consequently, it asserted, since the Bank had not yet honored the check and it would not have any liability as drawee thereon until it was accepted, there was no extension of credit and hence no debtor-creditor relationship. The Objecting Creditor, on the other hand, insisted that while normally acceptance by the drawee bank is required to constitute an overdraft, this total course of dealing showed irrevocably that the Bank was extending credit almost daily by the repeated holding of checks until, by a questionable, if not spurious, practice the Bankrupt would ostensibly replenish his account by checks which were known to be kited or swapped. Regardless of the form, then, this was the equivalent of an acceptance constituting an overdraft which would give rise to a debtor-creditor relation. Hennessy Bros. & Evans Co. v. Memphis National Bank, 6 Cir., 1904, 129 F. 557; Becker v. Fuller, 1917, 99 Misc. 672, 164 N.Y.S. 495; City of Pittsburg v. First National Bank, 1911, 230 Pa. 176, 79 A. 406; Vandagrift v. Masonic Home, 1912, 242 Mo. 138, 145 S.W. 448.

We think it would be improper for us to indicate what the rule of law should be. The Referee, although he undertook to reach a dispositive conclusion on it, was not faced with that necessity. Nor was the ...