In re Fred Stern & Co.

• Decision Date: 14 December 1931
• Docket Number: No. 89.,89.
• Citation: 54 F.2d 478
• Parties: In re FRED STERN & CO., Inc. FEDERAL INTERNATIONAL BANKING CO. v. CHILDS.
• Court: U.S. Court of Appeals — Second Circuit

54 F.2d 478 (1931)

In re FRED STERN & CO., Inc. FEDERAL INTERNATIONAL BANKING CO. v. CHILDS.

No. 89.

Circuit Court of Appeals, Second Circuit.

December 14, 1931.

Zalkin & Cohen, of New York City (Nathan Coplan, of New York City, of counsel), for trustee.

Martin Conboy, of New York City (David Asch, of New York City, of counsel), for appellee.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

MANTON, Circuit Judge.

Fred Stern & Co., Inc., a business corporation engaged in importing and selling rubber, was adjudicated a bankrupt on January 21, 1925. The appellee, a banking corporation, filed a claim for $234,664, which arises from advances of money made during the year 1924. This was pursuant to an agreement between the bankrupt and the appellee, made in the latter part of 1923, by which appellee established a revolving credit in favor of the bankrupt for $250,000. Unknown to the appellee, Fred Stern & Co., Inc., at this time was insolvent. However, the bankrupt availed itself of this credit from time to time, almost to the full amount, and, when the petition in bankruptcy was filed, it owed appellee about $240,000. On December 31, 1923, appellee was furnished by the bankrupt with its statement showing an excess of assets over liabilities of $1,001,000. Nothing in the record denies the proclaimed lack of knowledge on the part of the appellee as to this financial condition. Appellee advanced up to the full amount of the credit shortly after March, 1924, and this continued until the bankruptcy by various advances and payments under the following arrangement:

When the bankrupt wished to utilize funds maturing on a date, it sent the appellee an acceptance draft covering the amount several days in advance of the date of maturity, and at the same time referred to the collateral pledged against the loan. Upon receipt of advice by the appellee from its New York bank that the amount which was maturing had been paid, the appellee wired its bank correspondent to pay the bankrupt the proceeds of the new acceptances. The drafts were sent to the appellee with a statement that the bankrupt expected to take up the maturing acceptance on a certain date, and in order to use the open line of credit was inclosing a new draft or drafts for substantially the same amount, and that the inclosed draft covered a certain amount of rubber sold to a named purchaser. In this manner, each time the bankrupt made a payment to appellee, the latter paid back to the bankrupt about the same amount. When the appellee's bank correspondent made a payment to the bankrupt, as a condition of so doing, it obtained a trust receipt purporting to cover the rubber specified in the preceding letter from the bankrupt to the appellee. It is established that the appellee regarded these trust receipts as issued in good faith, believing that they covered actual rubber shipments, and states that it would not have made the advance if it had known that there was no actual security given, as was the fact.

The trustee's objection is made against claims which were not secured by valid trust receipts. The trustee also argues that there is a distinction between all items which were paid and the last one. This last item was part of the same series of transactions and consisted of the payment by the bankrupt of $19,488, on December 27, 1924, for a maturing draft. Three days prior thereto, the appellee advanced to the bankrupt $19,040 in connection with, and in pursuance of, this revolving credit agreement, and it was upon assurance that the $19,488 would be paid when due. The distinction sought to be drawn between this last item and all the others is the fact that the advance to the bankrupt had been made a few days before the bankrupt's payment to the appellee. All the advances made by the appellee enriched the bankrupt's estate to the extent of $240,000. At no time during the four months' period preceding bankruptcy did the bankrupt owe appellee more than the amount due on April 19, 1924, except for a few days when it arose to $261,766, which was due to an advance payment concerning which it is not claimed there was a preference.

But it is claimed by the trustee that the bankrupt preferred the appellee to the extent of $360,998.40 by payments during 1924, and it was argued that, as a condition of sharing in the dividends to be paid by the estate, this sum must first be paid. The argument is that the transactions are null and void under section 15 of the New York Stock Corporation Law (Consol. Laws, c. 59). Appellant says we are not concerned with a preference under the Bankruptcy Act, § 57g (11 USCA § 93(g). Section 15 provides:

"No corporation which shall have refused to pay any of its notes or other obligations, when due, * * * shall transfer any of its property to any of its officers, directors or stockholders, directly or indirectly, for the payment of any debt, or upon any other consideration than the full value of the property paid in cash. No conveyance, assignment or transfer of any property of any such corporation by it or by any officer, director or stockholder thereof, nor any payment made, judgment suffered, lien created or security given by it or by any officer, director or stockholder when the corporation is insolvent or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporation, shall be valid. * * * Every person receiving by means of any such prohibited act or deed any property of a corporation shall be bound to account therefor to its creditors or stockholders or other trustees. * * * No such conveyance, assignment or transfer shall be void in the hands of a purchaser for a valuable consideration without notice. * * *"

Under this act, there are two essentials to be established to constitute a violation: First, that the debtor corporation must have been at the time of the transfer insolvent, or its insolvency must have been imminent; and, second, the transfer must have been made with an intent by the debtor to give a preference. Grandison v. Robertson, 231 F. 785 (C. C. A. 2); Kolkman v. Mfgs. Trust Co., 27 F. (2d) 659 (C. C. A. 2); Arbury v. Kocher (D. C.) 18 F.(2d) 588. The payments were made by the bankrupt in the ordinary course of the bankrupt's business, and were such as might have been made by it if solvent. The payments were not made in contemplation of insolvency or winding up as an impending fact, but apparently with the expectation of continuing the business. Cardozo v. Brooklyn Trust Co., 228 F. 333 (C. C. A. 2); Karasik v. People's Trust Co. (D. C.) 252 F. 324. With the action of the bankrupt reasonably susceptible to such a construction rather than to a wrongful act, we should ascribe such an intent rather than an intent to prefer this creditor. Lopez v. Campbell, 163 N. Y. 340, 57 N. E. 501; Dutcher v. Importers' & Traders' Nat'l Bank, 59 N. Y. 5. In the Dutcher Case (decided in 1874) it was well said: "A payment made with a view of giving a preference to a particular creditor is one rarely if ever made in the usual course of business. In such a case the creditor will usually be sought out by the debtor and payment made by an unusual transfer of assets. * * *" And section 15 of the Stock Corporation Law does not prohibit the directors of a corporation from paying or securing a debt of the corporation. Gordon v. Southgate Building Co., 109 App. Div. 838, 96 N. Y. S. 717.

The Bankruptcy Act defines a preference...