Hussey v. Richardson-Roberts Dry Goods Co.

• Decision Date: 16 October 1906
• Docket Number: 2,365.
• Parties: HUSSEY v. RICHARDSON-ROBERTS DRY GOODS CO.
• Court: U.S. Court of Appeals — Eighth Circuit

148 F. 598

HUSSEY v. RICHARDSON-ROBERTS DRY GOODS CO.

No. 2,365.

United States Court of Appeals, Eighth Circuit.

October 16, 1906

Joseph V. C. Karnes, Alexander New, Edwin A. Krauthoff, and W. S McClintock, for appellant.

R. E Culver, for appellee.

Before SANBORN, HOOK, and ADAMS, Circuit Judges.

ADAMS Circuit Judge.

The only question in this case is whether a just demand held by Richardson-Roberts Dry Goods Company against the bankrupt Sowers, and secured by chattel mortgage, should be allowed as a secured or general debt against the estate. That depends upon whether the mortgage constituted a voidable preference under the provisions of the bankruptcy act of 1898 as amended. Section 60(a) of that act (act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3445)) defines a preference as follows:

'A person shall be deemed to have given a preference if, being insolvent, he has within four months before the filing of the petition * * * made a transfer of any of his property, and the effect of the enforcement of such * * * transfer will be to enable any one of his creditors to obtain a greater percentage of his debts than any other of such creditors of the same class.'

Section 60(b) of the act defines a voidable preference as follows:

'If the bankrupt shall have given a preference, and the person receiving it * * * shall have had reasonable cause to believe that it was intended thereby to give a preference it shall be avoidable by the trustee.'

Undoubtedly the conveyance by the bankrupt of his stock of goods by the mortgage in question constituted a preference within the meaning of the act. The mortgage was executed within four months before the filing of the petition. The bankrupt, as it now appears, was then insolvent, and the effect of the enforcement of the mortgage was necessarily to enable the mortgagee to obtain a greater percentage of its debt than other creditors of its class. But these facts do not render the mortgage voidable. To make it so the creditor must have had reasonable cause to believe that it was intended thereby to give a preference.

The mortgage having been executed within the prescribed four months, and necessarily operating, if the bankrupt was then insolvent, to enable the mortgagee to get a greater percentage of its debt than other like creditors, the question of fact is much simplified, and, as conceded by counsel for both sides, is simply this: Did the mortgagee at the time it took the mortgage have reasonable cause to believe the bankrupt was then insolvent? The referee found in substance that neither the mortgagee nor its attorney knew that the bankrupt was insolvent, but that they had reason to believe that he could not then pay all his creditors in money, and 'that some of them would be compelled to depend upon land' which, it was understood, the bankrupt was then negotiating to take in exchange for his stock of goods. On such a finding the referee concluded that the creditor had reason to believe the bankrupt was insolvent. The district judge, on a proper certification to him of the question, after first considering the facts found and testimony taken by the referee, and again considering that and other proof taken upon a motion for a rehearing, found the issue in question in favor of the mortgagee.

The referee obviously adopted an erroneous criterion in determining that issue. A person within the meaning of the bankruptcy act is not insolvent merely because he is unable to pay his debts in money as they become due in the ordinary course of business. Such was the test of insolvency under the bankruptcy act of 1867 (Toof v. Martin, 13 Wall. 40. 20 L.Ed. 481; Dutcher v. Wright, 94 U.S. 553, 24 L.Ed. 130), but by the provisions of section 1, cl. 15, of the act of 1898 (Act July 1, 1898, c. 541, 30 Stat. 544 (U.S. Comp. St. 1901, p. 3419)), as amended, insolvency exists only when the aggregate of a person's property exclusive of certain items therein mentioned 'shall not, at a fair valuation, be sufficient to pay his debts. ' Recognizing the test to be as just quoted, the learned district judge twice heard the issue involved in this case, and after a careful and critical consideration of the evidence as disclosed by his memorandum of opinion before us, twice reached the conclusion that the mortgagee did not have reasonable cause to believe its creditor insolvent when it took the chattel mortgage.

The main facts from which that conclusion was deduced are substantially as follows: The mortgagee had but recently commenced doing business with the bankrupt. In the spring of 1904, before it began selling him goods, it made the inquiries usual among jobbers to determine whether he was entitled to credit, and between that time and September, when he became bankrupt, had sold him about $2,000 worth of dry goods. He was slow in making payments as they matured, but with knowledge of that fact the mortgagee kept on selling him goods. The mortgagee about September 1st learned that he had mortgaged his stock for $1,000 to a man by the name of Barrett, and an attorney was sent to Quenemo, Kan., where the bankrupt did business. He learned that the bankrupt had borrowed $1,000 from Barrett for the purpose of paying a debt that was then due, and was informed that the mortgage had been executed with the consent and approval of the wholesale grocery house which was one of his two remaining merchandise creditors. An investigation then followed into the financial condition of the bankrupt. His stock was examined, and although represented by the bankrupt to be worth $8,000, was considered by the attorney of the mortgagee to be conservatively estimated at $5,000. He also had about $100 in open accounts, and the fixtures and equipment of a bakery which cost him between $300 and $400. The indebtedness of the bankrupt was represented by him to be not over $3,700, including the mortgagee's debt. The...