Hackney v. Raymond Brothers Clarke Company

• Decision Date: 22 April 1903
• Docket Number: 12,644
• Parties: WALTER W. HACKNEY, TRUSTEE, v. RAYMOND BROTHERS CLARKE COMPANY. [*]
• Court: Nebraska Supreme Court

94 N.W. 822

68 Neb. 624

WALTER W. HACKNEY, TRUSTEE, v. RAYMOND BROTHERS CLARKE COMPANY. ^[*]

No. 12,644

Supreme Court of Nebraska

April 22, 1903

ERROR to the district court for Lancaster county: LINCOLN FROST DISTRICT JUDGE. Affirmed.

Affirmed.

John S Bishop, Robert S. Mockett and Orpheus B. Polk, for plaintiff in error.

Henry H. Wilson and Elmer W. Brown, contra.

POUND C. BARNES and OLDHAM, CC., concur.

OPINION

POUND, C.

This is an action by the plaintiff, as trustee in bankruptcy of one Erlenborn, to recover an alleged preference claimed to have been received by the defendant as a creditor of said Erlenborn. The transaction by reason whereof a preference is alleged to have resulted was, in substance, this: Erlenborn was a retail merchant, and was indebted to several wholesalers, among others, to the defendant. One Kettering bought out Erlenborn, and, as part of the purchase price of the latter's stock, put in the account of the defendant against Erlenborn, which he had purchased at a discount of 25 per cent. The principal issues were whether Erlenborn was insolvent at the time of this transaction; whether Kettering and the defendant had reasonable ground to believe him insolvent; and whether the transfer of the account from the defendant to Kettering was an absolute transfer, made in good faith, without any understanding that Kettering was to be protected, and without any agreement or understanding that the account was to be used as part of the purchase price in a contemplated purchase of Erlenborn's stock, or was merely a colorable device for the purpose of evading the bankruptcy law and enabling the defendant to obtain a preference. The sale took place three months prior to the institution of bankruptcy proceedings, and consequently would be within the terms of the act in case we should hold the transaction amounted to a preference. There were two trials in the court below. At the first trial a verdict was rendered for the plaintiff. A new trial was granted, which resulted in a verdict and judgment for the defendant. The plaintiff has come to this court on error, and complains of the order of the district court granting a new trial after the first verdict, and of its rulings and judgment at the second trial.

A much stronger case is necessary to warrant this court in interfering with a second verdict and judgment on the merits by reason of alleged error in setting aside a prior verdict and granting a new trial, than where a motion for a new trial has been denied. Weber v. Kirkendall, 44 Neb. 766, 63 N.W. 35. The new trial appears to have been granted because the district court was of opinion that one of its instructions at the first trial was erroneous. We think this conclusion was correct, and that the error in the instruction was sufficient to justify its action. Among other things, the jury were instructed that notice of facts sufficient to lead a prudent man to the conclusion that a debtor "could not meet his obligations as they matured in the ordinary course of business" was notice of the insolvency of such debtor within the meaning of the bankruptcy act. This was clearly erroneous. Under a former statute insolvency was so defined; but the present act gives a materially different meaning to that term. In section 1 it is provided that "a person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property * * * shall not, at a fair valuation, be sufficient in amount to pay his debts." Manifestly, a person may not be able to meet current obligations and yet his property at a fair valuation may be sufficient to pay his debts. So long as the insolvency of Erlenborn at the time of the transfer was in issue, we can not say this was not prejudicial error. Notice that a debtor has not paid a claim at maturity is not necessarily and conclusively notice of insolvency under the present law. In re Eggert, 102 F. 735, 43 C. C. A. 1. As one of the facts relied on was that Erlenborn was not meeting his account with the defendant promptly, this point became very material.

The principal controversy with respect to the second trial turns upon the instructions of the court. The plaintiff contended that the necessary effect of the sale of defendant's claim against Erlenborn to Kettering was to prefer the defendant, while the defendant contended that it had a right to sell its claim to whom it pleased, the same as any other property, so long as it made an absolute transfer without any intent to evade the bankruptcy law, and without any secret understanding or agreement which would give it such effect. The court took the latter view, and instructed the jury, in substance, that it was a question of fact whether the transfer of the account was absolute and in good faith, or a mere colorable device for the purpose of securing a preference indirectly. Whether or not the defendant had reasonable ground to believe Erlenborn insolvent, and to believe that the purchase of the account by Kettering would operate as a preference, becomes an important question in connection with the issue as to the nature and effect of the transaction. The trustee in bankruptcy may recover money paid by the bankrupt as a preference only when the person receiving it had reasonable ground to believe that a preference was intended. Such is the language of the statute, and the courts so hold. Pirie v. Chicago Title & Trust Co., 182 U.S. 438, 45 L.Ed. 1171, 21 S.Ct. 906. If the creditor has reasonable ground to believe that the debtor is insolvent, and the obvious effect of receipt of the money under those circumstances is to give him an advantage over other creditors, he is chargeable with notice of intention to prefer. Pirie v. Chicago Title & Trust Co., supra. A person must be held to intend the obvious results of what he does. Notice that such results will follow is notice of the intention with which the act is done. Johnson v. Wald, 93 F. 640; In re Fort Wayne Electric Corporation, 99 F. 400. In Johnson v. Wald the court say:

"Where an insolvent debtor transfers to one of his creditors, in payment of his debt, personal property sufficient in value to satisfy the debt in full, his intent to prefer such creditor over his other creditors,' necessary to make such transfer an act of bankruptcy, will be presumed; the preference being the natural result of the transfer." Hence, in such cases, the crucial point is reasonable cause to believe the debtor insolvent. Whether a creditor had reasonable cause to believe his debtor insolvent within the purview of section 60 of the bankruptcy act, is a question of fact. In re Eggert, 102 F. 735, 43 C. C. A. 1. In determining this question, it is not necessary to find that the creditor actually knew or believed that the debtor was insolvent. He is chargeable with notice of such facts as a reasonable inquiry, in view of the circumstances with respect to the debtor's condition which were brought home to him, might fairly be expected to disclose. In re Eggert, supra. But a mere knowledge that the debtor has other liabilities, or of circumstances which could operate no further than to create a suspicion of possible insolvency, is not always sufficient. In the Eggert case the circuit court of appeals say:

"The resultant of all these decisions we take to be this: That the creditor is not to be charged with knowledge of his debtor's financial condition from mere nonpayment of his debt, or from circumstances which give rise to mere suspicion in his mind of possible insolvency; that it is not essential that the creditor shall have actual knowledge of, or belief in, his debtor's insolvency, but that he should have reasonable cause to believe his debtor to be insolvent; that if facts and circumstances with respect to the debtor's financial condition are brought home to him, such as would put an...