Grandison v. National Bank of Commerce of Rochester

• Citation: 231 F. 800
• Decision Date: 15 February 1916
• Docket Number: 142.
• Parties: GRANDISON v. NATIONAL BANK OF COMMERCE OF ROCHESTER. In re O. L. GREGORY VINEGAR CO.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

231 F. 800

GRANDISON v. NATIONAL BANK OF COMMERCE OF ROCHESTER.

In re O. L. GREGORY VINEGAR CO.

No. 142.

United States Court of Appeals, Second Circuit.

February 15, 1916

James M. E. O'Grady, of Rochester, N.Y., for appellant.

Thomas C. Burke, of Buffalo, N.Y. (Thomas C. Burke, Frank Gibbons and Henry W. Pottle, all of Buffalo, N.Y., of counsel), for appellee.

Before LACOMBE, COXE, and ROGERS, Circuit Judges.

ROGERS Circuit Judge.

This suit is brought by a trustee in bankruptcy to recover certain sums of money which it is alleged the defendant received preferentially, and which it is therefore not entitled to retain as against the complaint. The facts in this case are in some respects similar to those in the case of Grandison v. Robertson, 231 F. 785, . . . C.C.A ., decided at this term, although in certain particulars they are dissimilar. In both cases the same plaintiff brings the suit as trustee of the same bankrupt corporation. In both cases the court below adjudged certain payments to have been preferential and void, and required defendants to pay over to the trustee the payments thus found to have been preferential and void.

The bankrupt, the O. L. Gregory Vinegar Company, was and is a stock corporation existing under the Business Corporations Law of the state of New York. It was organized to carry on the business of manufacturing cider and vinegar in the city of Tonawanda, N.Y. An involuntary petition in bankruptcy was filed against it on February 15, 1910, and on March 4, 1910 it was adjudged a bankrupt, and on March 28, 1910, the complainant was appointed trustee of its estate. The transactions out of which the preferences arose were as follows:

Subsequent to October 15, 1909, four months prior to the filing of the petition in bankruptcy, the bankrupt assigned to O. L. Alexander, its president, certain accounts receivable belonging to it, and thereafter the said Alexander collected on the assigned accounts certain moneys which he deposited with the defendant in an account known as the 'O. L. Alexander Collateral Account.' It is averred that defendant knew that the moneys so deposited were the proceeds of the assigned accounts, and that it also knew that the accounts had been assigned to Alexander by the bankrupt in pursuance of a certain resolution adopted on October 12, 1909, which resolved:

'That this company assign to the said O. L. Alexander as collateral security for the indorsements, as above stated, accounts receivable of this company and the proceeds thereof aggregating an amount not exceeding twenty thousand dollars ($20,000).'

The moneys received from these assigned accounts were deposited in defendant's bank in the manner above stated. The defendant credited the account with the amounts so received and debited it with the amounts taken from it to apply upon the notes made by the bankrupt and indorsed by Alexander and held by defendant. This was done pursuant to Alexander's direction. On January 12, 1910, defendant had received out of this account $10,950 and applied it on the bankrupt's indebtedness. On or about January 17, 1910, the bankrupt paid to defendant to apply on its indebtedness the farther sum of $4,266.90.

The claim is, as to this last sum, that the bankrupt had sold in bulk to Wallace & Co. on January 17, 1910, its entire stock of goods, wares, and merchandise with the knowledge and consent of defendant, and upon the understanding and agreement that defendant would discount the notes of Wallace & Co. and apply the same in payment of the notes of the bankrupt held by defendant, and that the arrangement was made for that purpose. The amount so received and applied by defendant, with interest thereon, aggregated $19,917.74, which, with costs, brought the amount up to $20,017.44, and judgment for that sum was entered.

The preferential payments were alleged in the bill of complaint to have been 'in violation of the provisions of the laws of the state of New York and of the United States of America.'

A trustee in bankruptcy is entitled under the Bankruptcy Act to recover a transfer of property if the following circumstances concur: (1) That a 'transfer' of the property of the debtor has taken place. (2) That the debtor at the time of the 'transfer' was insolvent. the filing of the petition in bankruptcy, or after the filing and before the adjudication. (4) The transfer must enable the creditor to obtain a greater percentage of his debt than other creditors of the same class. (5) The person receiving it must have had reasonable cause to believe that the enforcement of the transfer would effect a preference.

If the record discloses that in this case the defendant has received transfers from the bankrupt under the circumstances above stated, the trustee is entitled to his decree by virtue of the act of Congress, and without reference to the New York Stock Corporation Law. That act only becomes important as respects this case if it appears that the defendant, at the time it received the transfers, did not have reasonable cause to believe a preference would result, and that the bankrupt made the payments with the intention of giving a preference; for under the New York statute a preference is void if made with an intent to give a preference, without reference to the state of mind of the party who received the payment. A very large part of the argument and brief of the defendant's solicitor has been devoted to a consideration of the New York Stock Corporation Law (Consol. Laws N.Y.c. 59). He maintains that the trustee in bankruptcy cannot, under the circumstances of this case, maintain an action under the New York act. We see no reason for considering that act at all. In this case the facts come within the provisions of Bankr. Act, Sec. 60 (Comp. St. 1913, Sec. 9644), and the trustee is not under the necessity of relying upon section 67e (section 9651), which enables a trustee to reclaim transfers made by a bankrupt when the transfers are null and void as against creditors 'by the laws of the state, territory, or district in which such property is situate.'

I. That a 'transfer' of the property of the debtor was made is certain. That several transfers were made to Alexander, and through him to defendant, is not denied. It is not essential that the transfers should have been made directly to defendant. Any method of depleting an insolvent fund is sufficient. See Remington on Bankruptcy, Sec. 1300. As stated in National Bank of Newport v. National Herkimer County Bank, 225 U.S. 178, 184, 32 Sup.Ct. 633, 635 (56 L.Ed. 1042) (1912):

'To constitute a preference, it is not necessary that the transfer be made directly to the creditor. It may be made to another, for his benefit. If the bankrupt has made a transfer of his property, the effect of which is to enable one of his creditors to obtain a greater percentage of his debt than another creditor of the same class, circuity of arrangement will not avail to save it.'

And in the same case the court, speaking through Mr. Justice Hughes, said:

'The 'accounts receivable' of the debtor-- that is, the amounts owing to him on open account-- are, of course, as susceptible of preferential disposition as other property; and if an insolvent debtor arranges to pay a favored creditor through the disposition of such an account, to the depletion of his estate, it must be regarded as equally a preference, whether he procures the payment to be made on his behalf by the debtor in the account, the same to constitute a payment in whole or part of the latter's debt, or he collects the amount and pays it over to his creditor directly. This implies that, in the former case, the debtor in the account, for the purpose of the preferential payment, is acting as the representative of the insolvent, and is simply complying with the directions of the latter in paying the money to his creditor.'

II. That the debtor was insolvent when the transfers were made is well established upon the record. The Bankruptcy Act has not left to the courts to define the meaning of the term insolvent. But it expressly declares that:

'A person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, with intent to defraud, hinder, or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay his debts. ' Section 1, cl. 15.

To this definition the courts must strictly adhere. Counsel for defendant calls attention to a statement furnished by the bankrupt on September 1, 1909, which shows assets of $230,826.26 and liabilities exclusive of capital stock and profit of $100,803.46. Counsel, however, does not think this statement should be accepted at its face value, inasmuch as he insists that certain liabilities have been included which should have been excluded, and which would reduce the amount of liabilities to $76,208.06. We do not agree with him. The valuation placed upon land, buildings, and equipment $109,380.00, was not 'a fair valuation' of the property. When the bankrupt bought the property it made the purchase for $30,000. It paid $5,000 down and gave a mortgage for $25,000. This mortgage was afterwards assigned to defendant, the president of the defendant bank being one of the incorporators of the bankrupt. It is difficult to define what constitutes 'fair valuation.' It is much easier to say what is unfair valuation. In a case in the Southern district of New York in 1899, In re Martini, 93 F. 990, Judge Addison Brown thought that 'fair valuation' was determined by the amount the property brought at a sale on execution shown to have been in all respects fair and...