In re Armstrong

• Decision Date: 07 April 1906
• Docket Number: 254.
• Citation: 145 F. 202
• Parties: In re ARMSTRONG.
• Court: U.S. District Court — Southern District of Iowa

145 F. 202

In re ARMSTRONG.

No. 254.

United States District Court, S.D. Iowa, Western Division.

April 7, 1906

T. J Mahoney, John N. Baldwin, George S. Wright, J. P. Conner, E C. Lally, and George H. Mayne, for claimants.

J. L Kennedy, M. L. Learned, and George W. Paine, for the trustee.

McPHERSON District Judge.

Alexander Armstrong, several years ago came from Illinois, to Carroll county, Iowa, and engaged in farming and raising, feeding buying, and selling of live stock, doing a large business. He became possessed of about 2,500 acres of land near Glidden, in Carroll county, and later on of more than 600 acres of land in Monona county. He had several store buildings in Glidden, and about six years since acquired a residence worth several thousands of dollars, in the town, five or six miles from the farm. He was believed by all to be worth more than $200,000, and to be a man of high character, and his credit was measured by his requests. He was able to read in print, but in writing with difficulty, if at all. For several years he did part, at least, of his banking business at the German Bank in Carroll, Iowa, known in this case as the 'Hess Bank' from the name of the cashier. As time passed, he left the Hess Bank and became a borrower from former friends in Illinois, and from live stock commission men in Omaha and Chicago, and from an Omaha bank, presently to be mentioned, and from a bank in Carroll, referred to as the 'Arts Bank.' In buying property, he at times would assume the payment of mortgages, but usually credit was extended him on the strength of his own signature. He had a son Henry, the owner of much property, for whom he indorsed large sums, who in 1904, became involved. But his suretyship debts he did not disclose until disaster overtook the son, subsequent to the mortgages in question. Alexander Armstrong, July 27, 1904, filed in this court his petition in voluntary bankruptcy, and August 26, 1904, he was adjudicated a bankrupt.

Wm. Arts, of Carroll, the county seat of Carroll county, is a banker and capitalist. His bank, the German American Bank, known as the 'Arts Bank,' is a private bank of $50,000 capital. He is 64 years of age, and for the past two or three years, has been in bad health. He has three sons, W. A., Joseph, and Frank. W. A. Arts is his father's affairs. Joseph does not seem to have had much, if anything, to do with the matters involved herein. The son Frank is a merchant in Nebraska. In 1904, he was called to Carroll on account of the father's illness, and while there, he and the cashier, W. A. Arts, thought it best to go over the affairs of the bank, and they concluded to and did take, May 2, 1904, from Armstrong and wife, a mortgage on his Carroll county farm of 2,280 acres to secure four notes then aggregating $98,503.32. Mr. Arts was advised of this in the evening of that day by his son, and by a daughter who worked in the bank. He ratified the act, and in person took the mortgage the following day to the office of the county recorder and had it recorded; he then being convalescent. This mortgage being to secure an antecedent indebtedness, and given within four months of the proceedings in bankruptcy, is assailed by the trustee and other creditors, as being an unlawful preference.

The Union National Bank is of Omaha, with G. W. Wattles as its president, and Mr. Thomas as its cashier. Wattles had resided before and since he (Wattles) removed to Omaha 12 years ago. June 13, 1904, Armstrong give his note evidencing his indebtedness to the Wattles bank for $22,000, and a mortgage securing the same on the lands in both counties. He also gave for the same purpose a chattel mortgage on all his farm machinery and the crops for 1904, on the Carroll county farm. This note and these mortgages were taken in the name of G. W. Wattles, trustee, for convenience, the Union National Bank in fact being the owner. After taking the mortgage of $98,503.32, Arts continued business with Armstrong; the latter drawing checks on Arts' bank, thereby creating overdrafts aggregating near $3,000, which, with other indebtedness amounted June 17, 1904, to $5,512.40. On that day Armstrong gave Arts a mortgage to secure that sum, conveying 615 acres of Monona county land. Arts seeks to enforce that mortgage, and the trustee assails it as being an unlawful preference, as having been given within four months of the bankruptcy proceedings, and given to secure a prior indebtedness. These three claims have been submitted to the court. They were referred to the referee who took and has reported the evidence with his findings of fact, practically all of which are assailed by exceptions, some by one party, and some by others. While the court indorses some of the findings, but not all, the case is simplified for this court, and perhaps for the Appellate Court, if an appeal or proceedings for review be taken, by making independent findings of fact.

First, as to the McPherson claim:

The note for $22,000 is negotiable in form. McPherson bought it before due, knowing nothing of its consideration, nor that it was a renewal of prior notes, and knew nothing concerning any facts connected with the mortgage. In the usual course of business he paid Wattles in money, its full face value. A few days before buying the note, he knew of a proposed attachment suit against Armstrong, and was asked to become a surety on the bond. He declined to become such surety, and advised against bringing the action.

But he acquired no knowledge of Armstrong's insolvency, and all information that came to him with reference to the proposed action is of no importance in this case. During the pendency of this action, McPherson has sold the note and mortgages back to Wattles, or the bank. Whether selling the note back places the bank in a different position from what it once occupied I will not discuss. What I hold is that the note represents an actual and bona fide indebtedness for the full amount expressed. Armstrong has no defense to the note, nor any part thereof, in the hands of Wattles or his bank or in the hands of any holder. The mortgages securing the note would pass to McPherson both by assignment and as incidents to the note, and would pass back to Wattles, or the bank, when the note went back. But the question of these transfers, in my opinion, is immaterial, and it is not of the slightest concern whether Wattles or his bank, or McPherson, is pressing the claim. McPherson was an innocent holder of both the notes and mortgages for full value before due. Now Wattles' bank owns them. But the bankrupt statute controls the situation. I know of no authority that holds that an innocent purchaser before due of such paper, can escape from the bankrupt statute. And counsel for claimant cites no authority, and the contention is without force. If I am not correct in this, the dullest mind, with a stifling of the conscience, can easily circumvent the statute against unlawful preferences.

The McPherson claim was secured by mortgages. At the time they were given, Wattles and his bank had learned of the Arts mortgage. Mr. Thomas, the cashier, went to Armstrong to ascertain his financial standing which resulted in Armstrong giving him a signed written statement. That statement was to the effect that he owned Iowa real estate of the value of $223,400, after omitting his homestead. He placed the value of his homestead at $12,000. He placed his real estate mortgages, including the one to Arts, at $147,500, leaving the net value of his real estate, aside from his homestead, at $65,940. He represented his cattle, horses, hogs, and machinery to be worth $19,300, and omitting his homestead his net worth, as per his statement, was $42,340. In my opinion the homestead should not be considered on the question of solvency or insolvency, although as eminent a judge as Judge Hammond held otherwise in Re Bauman (D.C.) 96 F. 946, and the letter of the statute sustains that holding.

In the year previous Armstrong made a written statement to Wattles' bank for the purpose of obtaining credit, now covered by the note and mortgages in question, in which his property, including his homestead, was listed at $246,750, and his liabilities at $36,000. Armstrong was believed by Wattles and his associates in the bank, as well as by the people generally, to be a man of integrity and high character, and in all respects worthy of belief. That Wattles and his cashier, in taking the security, believed Armstrong to be solvent, I have no doubt, and it is equally clear that Armstrong himself then believed the same. There are but two facts tending to show that Armstrong then believed he was creating an unlawful preference. The one fact is that Armstrong so testifies. But as against his testimony is evidence from witnesses equally credible. And against his testimony are his two written statements; on one of which he obtained credit, and on the other was granted time. The fact that the bank asked for security, or even was insistent, is no proof of knowledge of insolvency. If such facts are to be deemed material as showing insolvency, or knowledge of insolvency, then any and every man asking for security is to be challenged in his effort to protect himself against future contingencies. Wattles knew that Arts had his claim covered by a mortgage, and it naturally and legitimately was a reason why he should have his claim secured. But wanting either a past or present indebtedness secured is not proof of knowledge of insolvency. Armstrong was a large dealer in cattle, and it is common knowledge of all informed people in the West, that such a business is of a fluctuating character. The solvent cattle dealer of this year may next year be in embarrassed circumstances.

The evidence fails to...