Holbrook v. United States Nat. Bank

• Decision Date: 25 July 1927
• Docket Number: No. 922.,922.
• Parties: HOLBROOK v. UNITED STATES NAT. BANK et al.
• Court: U.S. District Court — Southern District of Texas

20 F.2d 961 (1927)

HOLBROOK v. UNITED STATES NAT. BANK et al.

No. 922.

District Court, S. D. Texas, at Galveston.

July 25, 1927.

Armstrong & Cranford, of Galveston, Tex., for trustee.

Bryan F. Williams, of Galveston, Tex., for defendant city of Galveston.

HUTCHESON, Judge.

This is a suit brought by the trustee in bankruptcy to recover from the United States National Bank and the city of Galveston the sum of $90,000, which on October 7, 1926, had been transferred on the books of the United States National Bank on the order of Ed McCarthy acting by S. L. McCarthy, his agent, from the credit of Ed McCarthy & Company to the credit of the city of Galveston.

The city is sued under sections 60a, 60b, of the Bankruptcy Act (Comp. St. § 9644), the plaintiff charging that the bankrupt, being indebted to the city of Galveston in more than that sum, did on the 7th of October, 1926, at a time when he was insolvent, cause a transfer of the amount claimed to be made on the books of the United States National Bank, where it stood to the credit of Ed McCarthy, from his credit to the credit of the city of Galveston; that such transfer therefore acted as a preference, and that the city of Galveston, "the person receiving it or to be benefited thereby, or its agent acting therein," had reasonable cause to believe that such transfer would effect a preference.

The United States National Bank is made a party upon some theory of liability which is not clearly disclosed in the pleadings or the argument and which I reject, that it made itself liable by participating in and permitting the transfer to be made. The evidence establishes without contradiction the following facts:

That S. L. McCarthy was, and for some time prior to October had been, commissioner of finance and revenue, as to whom the city charter provided: "He shall have under his special charge the enforcement of all laws for the assessment and collection of taxes of every kind, and the collection of all revenues belonging to the city from whatever source the same may be derived, and who shall also examine into and keep informed as to the finances of the city."

Lee Kempner is, and for some time prior to the matters in controversy had been, treasurer of the city of Galveston, whose duty as determined by the charter, is to receive and keep all moneys belonging to the city; the charter providing: "All moneys belonging to the city and received by any officer or agent thereof, either from collections, fines or any source whatever, shall be by him deposited with the said treasurer daily." Lee Kempner was an officer of the United States National Bank, as was also his brother, I. H. Kempner, and A. J. Peterson, the cashier of the bank.

The evidence further shows that the treasurer kept deposits of the city of Galveston in various sums in various banks, among them the individual bank of Ed McCarthy, doing business under the name of Ed McCarthy & Co.; that S. L. McCarthy was an agent of his brother, and authorized to sign Ed McCarthy's name to checks. It also shows that the city's bills were paid by voucher checks drawn on Ed McCarthy & Co., and before being presented for payment these were countersigned by S. L. McCarthy.

It also shows that it had been the habit and custom of I. H. Kempner, in the absence of his brother, Lee Kempner, to act as treasurer, sign checks for him, and generally look after the financial affairs in his care as treasurer during his absence. That at the time of the transaction out of which this suit grows Lee Kempner was absent from the city of Galveston; that for a short time before the transactions complained of there had been threats of a run on the McCarthy bank, and a tense condition of affairs existed there.

As early as October 4 a conversation was had between Sam McCarthy, representing his brother Ed, and I. H. Kempner and Peterson, in which there were statements by McCarthy that he was solvent, but that he was in great need for funds, and that there was in progress a run of greater or less proportion upon the McCarthy bank. At that time, at the close of business on October 4, Ed McCarthy had to his credit in the United States National Bank $148,934.29. The run upon the McCarthy bank continued and progressively increased, and the record shows that between September 30 and October 7, upon which latter date the bank closed its doors, the withdrawals exceeded the deposits in the sum of $300,000.

On that date S. L. McCarthy, having in his possession ready for his countersignature warrants on account of city bills of more than $150,000, knowing or fearing that, if these warrants were delivered, it would bring the affairs of Ed McCarthy to a collapse, had a conference with I. H. Kempner and Peterson, seeking advice. I. H. Kempner, acting on behalf of the treasurer, and himself, being interested on account of the fact that one of his brothers was surety on the bond of Ed McCarthy to the city for sums deposited there, advised McCarthy not to withhold his signature from the warrants, but to change by stamp the bank on which they were payable from Ed McCarthy to the United States National Bank, and transfer to the city of Galveston $90,000 of the funds on deposit to Ed McCarthy's credit with the United States National Bank, and clear all the vouchers thus altered through the United States National Bank, which was done.

At that time Ed McCarthy & Co. was hopelessly insolvent, and the effect of transferring the $90,000 which stood to his general credit in the United States National Bank to the credit of the city of Galveston was to prefer the city of Galveston to that amount. That such would be the effect McCarthy, Peterson, and Kempner knew; McCarthy knowing fully the fact of the insolvent condition of his brother, and Kempner and Peterson knowing so much that no reasonably minded person acquainted with business and banking practices and conditions could fail to know, or at least to believe, that the effect of the transfer would be to prefer the city.

The transfer was effected in the following manner: I. H. Kempner, in the name of the city treasurer, drew a draft on Ed McCarthy & Co. for $90,000. This draft was presented to S. L. McCarthy by Peterson, and S. L. McCarthy gave him a check, signed "Ed McCarthy, by S. L. McCarthy," on the United States National Bank for $90,000 in exchange for the treasurer's draft. The bank made the proper book entries, passing $90,000 out of Ed McCarthy's account and into the account of the city of Galveston.

The evidence of insolvency and of the fact that the persons engaged in effecting the transfer of the $90,000 knew of the insolvency, and of the fact that the city was thereby obtaining a preference, is so overwhelming that no point on these matters is seriously made by the city. The city, however, intrenches itself behind the proposition that, granting insolvency and knowledge of insolvency by those who acted in the matter, plaintiff must fail because, as the city says, those persons so acting were neither the city nor the agents of the city, and that there is no proof whatever bringing home knowledge to the city through any of its accredited and authorized agents.

I agree with the city in its contention on the facts that no other person than the three actually involved in this transaction knew anything about it, and in its contention that in law, unless the knowledge of these persons, or some of them, can be imputed to the city, plaintiff's suit must fail. The plaintiff vigorously asserts that the city is bound by the knowledge of the actors in this affair, because the persons acting in it were the city's agents...