In re Bresnan, 5155.

• Decision Date: 28 October 1930
• Docket Number: No. 5155.,5155.
• Citation: 45 F.2d 193
• Parties: In re BRESNAN et al.
• Court: U.S. District Court — District of Maryland

45 F.2d 193 (1930)

In re BRESNAN et al.

No. 5155.

District Court, D. Maryland.

October 28, 1930.

France, McLanahan & Rouzer, of Baltimore, Md., for petitioner.

George W. Lindsay and Wm. Ewin Bonn, both of Baltimore, Md., for respondent.

WILLIAM C. COLEMAN, District Judge.

This case arises upon a petition of the trustee in bankruptcy filed pursuant to the provisions of the Bankruptcy Act (11 USCA § 11, subsec. 10) and General Order 27 (11 USCA § 53), for a review of the findings of the referee allowing the claim of a creditor to certain funds, in opposition to the claim of the Trustee in bankruptcy.

In a proceeding of this kind the scope of the court's power to review is very broad. The court is not bound by the referee's findings of fact any more than it is bound by his conclusions of law. It is permissible for the court to remand the case for the taking of further testimony, or even to take additional testimony itself, if such appears to the court necessary or proper. However, if the referee's findings on questions of fact are based upon a review of conflicting evidence or involve weighing the credibility of witnesses, they are entitled to very great weight, and will not be rejected or disregarded by the court unless manifestly erroneous. Free v. Shapiro (C. C. A.) 5 F.(2d) 578.

The pertinent facts found by the referee and concerning which there is no dispute are the following: For some years prior to the filing of the petition in bankruptcy, which took place on November 23, 1927, the bankrupts, John J. Bresnan and Merritt G. Rasin, copartners trading as J. J. Bresnan & Co., had been engaged in the general contracting business, largely in road construction. The Pen Mar Company, which was engaged in the business of selling materials and supplies to contractors and builders, had dealt with the bankrupts for some five years prior to the bankruptcy proceedings, and for a number of months prior to the same had taken, from time to time, assignments from the bankrupts of money payable to them under various construction contracts, as security for amounts due the Pen Mar Company by the bankrupts for merchandise purchased and used in the execution of such contracts. As a result of this practice, some time prior to July 11, 1927, the Pen Mar Company held an assignment of money due to the bankrupts by the city of Baltimore on a sewer contract amounting to approximately $1,900. When this payment, however, became due from the city, Rasin, one of the bankrupts, collected it from the city engineer without the knowledge or consent of the Pen Mar Company, and appropriated it to the use of the partnership, upon learning which the Pen Mar Company demanded that the money be turned over to it, which was not done. Thereupon the Pen Mar Company refused to extend any further credit, or to deliver any more materials to the bankrupts, unless and until they made an assignment to it of all money due and to become due under their contracts with the city. Agreeing to this demand, the bankrupts addressed the two following communications to the Pen Mar Company:

"Baltimore, July 11th, 1927

"The Pen Mar Company, Inc., 323 Munsey Building, Baltimore, Md.

"Gentlemen: We hereby assign to Pen Mar Company, Inc. All money due us on Contracts , on which we are working for the Paving Commission of Baltimore City.

"Very truly yours,

"John J. Bresnan." "July 25, 1927.

"The Pen Mar Company, Inc., 321 Munsey Building, Baltimore, Maryland.

"Gentlemen: I hereby guarantee not to collect any of the checks for J. J. Bresnan and Company, on Contract No. 397.

"Yours very truly,

"John J. Bresnan "Merritt G. Rasin."

On the date of the second communication, namely, July 25, 1927, the bankrupts also sent the following communication to the mayor and city council and to the paving commission of Baltimore city:

"The Mayor and City Council, Paving Commission, Baltimore, Maryland.

"Gentlemen: We hereby assign to the Pen Mar Company, Inc., the total amount of money on Contract No. 397.

"Yours very truly,

"John J. Bresnan "Merritt G. Rasin."

It was mutually understood that the information as to the specific contracts, lacking in the bankrupts' communication of July 11th to the Pen Mar Company, was to be supplied later, or a new assignment was to be executed.

Between July 11th and 25th the Pen Mar Company furnished the bankrupts merchandise invoiced at approximately $3,600. On the latter date, the bankrupts owed the company approximately $23,000, which was greatly in excess of the sums then due by the city to the bankrupts under contract No. 397, The two communications of July 25th were delivered by the credit manager of the Pen Mar Company to the office of the highways engineer of the city of Baltimore. The other paper, dated July 11th, was not filed with the city. Between July 25th and November 23d the Pen Mar Company delivered additional material to the bankrupts on credit amounting to approximately $6,300. There was a further verbal understanding between the bankrupts and the Pen Mar Company on July 25th, to the effect that the former would require some part of the payments due from the city in order to meet their pay roll from time to time. On September 7th and October 18th, two checks for an approximate aggregate of $14,000 were drawn by the city on account of contract No. 397 to the order of "J. J. Bresnan and Company, c/o Pen Mar Company," were delivered to the Pen Mar Company, and were in due course indorsed and deposited in bank to the account of the Pen Mar Company. In addition to the foregoing payments, the bankrupts obtained during the month of September $3,000 for pay roll purposes by checks of the Pen Mar Company. Contract No. 397 between the bankrupts and the city of Baltimore was in the standard form and contained, among other provisions, the following: "Sub-letting or assigning of contract. The Contractor shall not sub-let, sell, transfer, assign or otherwise dispose of the contract or any portion thereof, or of the work provided for therein, or of his right, title or interest therein, to any person, firm or corporation without the written consent of the Engineer." The written consent of the city's engineer so required was never obtained. When contract No. 397 was finally completed, which the city accomplished through another contractor upon the bankruptcy of the Bresnan partnership, there remained due from the city under the contract approximately $10,500. Upon petition of the trustee, this court authorized and directed him to collect from the city this balance without prejudice, however, to any rights which he himself, or the Pen Mar Company, might have respecting the ownership of this balance, and, pursuant to such order, the city of Baltimore paid the trustee $7,500. It is this sum, as well as the balance of approximately $3,000 retained by the city under the contract, which the Pen Mar Company claimed and was allowed by the referee pursuant to his findings, in opposition to which the trustee has filed his petition for a review, and has been granted a hearing thereon.

The referee summarized his findings as follows: "(1) The Referee finds that the assignment of July 25th, 1927, from the bankrupts to the Pen Mar Company, was a valid equitable assignment and that its claim to the fund in question is superior to that of the Trustee. (2) The referee further finds that at the time of giving said assignment the bankrupts were insolvent. (3) That at the time of receiving said assignment the Pen Mar Company did not have reasonable cause to believe that same would create a preference."

The trustee claims that the first and third findings of the referee are erroneous for the reason: "(1) That the assignment of July 25, 1927, from the Bankrupts to the Pen Mar Company was not a valid equitable assignment and that the Pen Mar Company's claim to the fund in question is not superior to that of the trustee. (2) That at the time of receiving said assignment, the Pen Mar Company did have reasonable cause to believe that the same would create a preference."

The court concludes that the exceptions of the trustee must be overruled and the findings of the referee sustained for the following reasons. Under section 60a of the Bankruptcy Act (11 USCA § 96(a), a preference consists of a person, (1) while insolvent and (2) within four months of bankruptcy, (3) procuring or suffering a judgment to be entered against himself, or making a transfer of his property, (4) the effect of which would be to enable one creditor to obtain a greater percentage of his debt than any other creditor of the same class. Such preference is voidable at the instance of the trustee if (1) the person receiving it, or to be benefited thereby, has (2) reasonable cause to believe that the enforcement of a judgment or transfer would result in a preference. Section 60b, 11 USCA § 96(b). The burden is upon the trustee to establish these necessary facts. Manly v. Southern Supply Co. (C. C. A.) 14 F.(2d) 273; In re Klein Moffett Co. (D. C.) 28 F.(2d) 523.

All of the funds claimed by the trustee must be treated as property not in the custody of the bankruptcy court, because part of the money is still retained by the city, and that which the trustee holds has come into his hands by order of this court, subject to the express provision that, in so far as rights thereto are concerned, its status is not to be considered as having been changed by surrender to the trustee for the purpose of having the claims thereto adjudicated. Therefore, the position of the trustee with respect to the entire fund is that of a judgment creditor holding an execution duly returned unsatisfied, beginning as of the time when the petition in bankruptcy was filed, which in the present case was November 23, 1927. Bankruptcy Act, § 47a, 11 USCA § 75(a); Bailey v. Baker Ice Machine Co., 239 U. S. 268, 36 S. Ct. 50, 60 L. Ed. 275. The first question, therefore, to be determined is whether the first finding of the...