Fourth Nat. Bank of Wichita, Kan. v. Smith

• Decision Date: 11 December 1916
• Docket Number: 4555,161
• Citation: 240 F. 19
• Parties: FOURTH NAT. BANK OF WICHITA, KAN., v. SMITH (two cases). In re COX-BLODGETT DRY GOODS CO.
• Court: U.S. Court of Appeals — Eighth Circuit

240 F. 19

FOURTH NAT. BANK OF WICHITA, KAN., v. SMITH (two cases).

In re COX-BLODGETT DRY GOODS CO.

Nos. 161, 4555

United States Court of Appeals, Eighth Circuit.

December 11, 1916

J. G Carey and C. G. Yankey, both of Wichita, Kan. (R. L. Holmes W. E. Holmes, R. R. Vermilion, and Earle W. Evans, all of Wichita, Kan., on the brief), for appellant and petitioner.

Jean Madalene, of Wichita, Kan. (S. B. Amidon, E. L. Foulke, and S. A. Buckland, all of Wichita, Kan., on the brief), for respondent and appellee.

Before HOOK, Circuit Judge, and REED and BOOTH, District Judges.

BOOTH District Judge.

By appeal, and also by petition to revise, reversal is sought of the order of the District Court disallowing the unsecured claim of the bank against the estate of Cox-Blodgett Dry Goods Company, bankrupt, except upon the condition that the bank return to the estate the sum of $8,698.40, which sum was found by the court to have been received by the bankrupt as an unlawful preference. The following facts are not in dispute:

On and prior to August 30, 1913, the Cox-Blodgett Dry Goods Company hereinafter called the company, was in the wholesale dry goods business in Wichita, Kan., and doing a large business with the claimant bank, both as borrower and depositor. On the 30th of August, 1913, the company had on deposit with the bank, subject to check, about $25,000. On that day the bank presented to the company demand notes made by it, amounting to $25,000, and demanded payment. The company refused payment, whereupon the bank charged the checking account of the company with the amount of the notes. On the 2d day of September, 1913, the company applied to the bank for a restoration of its credit as a depositor, and as an inducement to the bank to reinstate its credit, and as security for the amount of indebtedness which the company would owe upon such reinstatement, agreed to assign to the bank a certain mortgage called the Tapp mortgage and to hypothecate a deed to a certain tract of land. As a result of the negotiation, the bank restored on its books the credit in favor of the company, taking new demand notes to evidence the indebtedness, and accepting the securities offered. Thereafter deposits were made by the company with the bank in the usual and regular course of business, and checks drawn against the account, until the 31st day of October, 1913, on which day the company had to its credit as a depositor the sum of $8,698.40. At that time the bank held six demand notes of the company amounting to something over $35,000. No demand for the payment of these notes had been made by the bank; but on the 31st day of October, 1913, information coming to the bank that a petition in bankruptcy against the company either had been filed or was about to be filed, the bank offset on the account of the company so much of its said indebtedness evidenced by the notes as equaled the amount of deposit of the company on the books of the bank, namely $8,698.40. On the same day a petition in bankruptcy was in fact filed against the company. The bank filed its proof of claim against the company for an unsecured debt of $13,879. The proof of claim set forth that the bank held as security for the payment of said demand notes the mortgage heretofore mentioned valued at $8,600; the deed for the land above mentioned, the equity in which it valued at $4,000; and that credit had been given by the bank upon its claim against the bankrupt company in these amounts, leaving due the sum of $13,879, after the offset of $8,698.40.

To this proof of claim the trustee filed exceptions: First, that the taking of the mortgage above mentioned by the bank amounted to a preferential transfer from the company; second, that the taking of the conveyance above mentioned was also a preferential transfer from the company to the bank; third, that the set-off by the bank of the amount standing to the credit of the company on October 31st, $8,698.40, against the notes owed by the company to the bank, was made by the bank with knowledge of the insolvency of the company, and created a voidable preference. The trustee objected to proof being made of any claim by the bank until said preferences were surrendered.

A hearing was had before the referee, who found that the transaction between the company and the bank on the 2d day of September, 1913, covering the reinstatement of the company's credit upon the books of the bank, and the transfer of the mortgage and the land as security to the bank was not a preferential transfer, within the meaning of the Bankruptcy Act. This conclusion of the referee was approved and affirmed by the District Court. Those conclusions have been acquiesced in by the trustee, and are not before us for review.

The referee further held that the set-off by the bank of the $8,698.40 standing to the credit of the bankrupt company on the books of the bank on October 31, 1913, against the debt of the bankrupt company to the bank, did not constitute an illegal preference, and need not be surrendered by the bank as a condition to proving its claim. Upon a petition of the trustee to review this conclusion of the referee, the District Court reversed the referee, and ordered the claim of the bank disallowed, except upon the condition that the bank should pay over to the trustee the amount of the deposit offset by the bank against the notes. The views of the trial court are indicated by the following excerpts from its decision:

'The act of the bank in making the application was a transfer of the bankrupt property toward the satisfaction of a debt evidenced by the demand notes. This transfer and the right of the bank to make it must be viewed and determined as of the date it occurred, and from what the bank knew or had reasonable cause to believe as to the financial condition of the bankrupt, and by what the bank intended to accomplish by its act. It is true the mere fact that a bank in the usual course of its business, acting under its banker's lien, charges a depositor's account with payment of due or past-due paper made by the depositor and held by the bank, believing or even knowing the depositor at the time is insolvent, will not defeat such transfer. * * * However, * * * no creditor, be it a banking corporation or other person, can take or receive payment from a debtor known at the time to be insolvent, and knowing, or having reasonable cause to believe, by the taking or receiving of such payment it is thereby securing a preference in payment over other creditors of the insolvent debtor of the same class. * * * The question, therefore, presented on this record, is: Did the bank know, or did it have reasonable cause to believe, at the date it applied the deposit of the bankrupt toward the satisfaction of the demand notes (that the) bankrupt was insolvent, and by such application it would obtain a preference in payment over the other creditors? * * * From all the proofs found in the record, I am entirely persuaded the bank at the time it made application of the deposit toward the payment of the demand notes of the bankrupt, not only knew the now bankrupt company was insolvent, and either on the verge of bankruptcy, or had actually gone into bankruptcy, but that it further knew, or at least had every reasonable cause to believe, after deducting the fair market value of the Tapp note and mortgage and the Oklahoma land, which it was justly entitled to retain and apply on the debt of the bankrupt to it, from the total of such debt, if it should further, as it did, apply the deposit account on the amount of the debt remaining, thus leaving only a small amount due it on the demand notes of the bankrupt, it would thus obtain such a preference in payment over other creditors of the bankrupt estate as would preclude it from proving such small balance as a debt against the estate under the provisions of the Bankruptcy Act, unless it should first surrender such preferential payment.'

In our judgment, the conclusions reached by the learned trial court were erroneous in three particulars: (1) In holding that the set-off by the bank was a transfer of the bankrupt's property; (2) in holding that knowledge by the bank of the insolvency of the company at the time of the set-off was a material factor in the situation; (3) in holding that the so-called preference resulting from the set-off was a voidable preference within the meaning of that term as used in the Bankruptcy Act.

In New York County Bank v. Massey, 192 U.S. 138, 24 Sup.Ct. 199, 48 L.Ed. 380, Stege & Bro. had an account in that bank, and the bank held two notes made by them falling due January 26, 1900, amounting to $40,000. On the morning of January 23d, the two notes were renewed, and in the afternoon of the same day a statement was rendered to the bank, which showed the firm to be insolvent. On January 22d, 23d, and 25th, deposits were made to the amount of $6,225.25, and on January 27th the firm filed a voluntary petition in bankruptcy. 'At the first meeting of creditors, February 9, 1900, the New York County National Bank filed its claim for $33,790.25. In its proof of claim the bank credited upon one of the notes, which became due on January 26, 1900, the deposit of $6,209.25. The claim was allowed by the referee in the sum of $33,750.25, being $40,000 less the amount on deposit in bank ($6,209.25), and a small rebate of interest on the unmatured notes. ' The District Court affirmed the order of the referee. The Circuit Court of Appeals reversed the District Court, holding that the set-off of the deposit would amount to a transfer, enabling the bank to obtain a greater percentage due to it than other creditors of the same class, and that the allowance of the claim should be refused unless the preference was...