In re Gillette

• Decision Date: 08 October 1900
• Docket Number: 2,109
• Citation: 104 F. 769
• Parties: In re GILLETTE et al.
• Court: U.S. District Court — Western District of New York

104 F. 769

In re GILLETTE et al.

No. 2,109

United States District Court, W.D. New York.

October 8, 1900

William C. Watson, for petitioner.

Wade &amp Stevenson, for respondents.

HAZEL District Judge.

This is an involuntary proceeding in bankruptcy. The petitioning creditors are Dunn, Salmon & Co., a corporation, the Bank of Batavia, a banking corporation, and D. Armstrong & Co., a co-partnership. The special master to whom the matter was referred to take proof and report has found that the firm of Gillette & Prentice have committed acts of bankruptcy while insolvent, and within four months previous to the filing of the petition, in this: that the alleged bankrupt, Gillette on or about the 3d day of January, 1900, conveyed and transferred to William E. Webster, his brother-in-law, who acted in behalf of Sarah A. Showerman and Jennie R Showerman, a material part of the property of the firm (being stock of goods and fixtures owned by the firm), with intent to hinder, delay, and defraud the creditors of the firm; that said firm has committed a further act of bankruptcy, in that while insolvent, and within four months previous to the filing of the petition, the said firm, through the alleged bankrupt, Gillette, on or about the 3d day of January, 1900 conveyed and transferred to the Bank of Batavia, one of the petitioners herein, the sum of $4,000 (being a part of the property of the firm of Gillette & Prentice), in payment of the individual debt of said Gillette, with intent to hinder, delay, and defraud the creditors of the firm. After the most careful consideration of the evidence in this case, I have no hesitation in sustaining the report of the special master in reference to the acts of bankruptcy committed by the alleged bankrupts. The Bank of Batavia had previous knowledge of the insolvent condition of the firm of Gillette & Prentice when it accepted payment of the note. The facts are substantially as follows: A few days before the payment of the note to the bank the president of the bank became aware of the insolvent condition of the alleged bankrupts. January 2, 1900, Mr. Armstrong, one of the petitioners herein, the president of the bank, and Gillette talked over the financial affairs of the alleged bankrupts. After discussing the amount of the assets and other property, the aggregate of which was not sufficient to pay their debts, a settlement of 50 cents on the dollar was recommended by the president of the bank, representing the Bank of Batavia, one of the petitioners herein, and Mr. Armstrong, representing D. Armstrong & Co., also petitioners herein. The stock and fixtures inventoried $7,200, and were claimed to be of the estimated value of $4,320. The liabilities at this time were estimated at $5,300. January 3, 1900, Webster bought the property for $4,000, with money received from Mrs. Showerman and her daughter, who are mother-in-law and sister-in-law, respectively, of Gillette, and paid the sum of $4,000 to Gillette, who immediately thereafter paid the note at the bank, instead of using the money received in an endeavor to compromise with his creditors, of which there was talk between two of the petitioners herein and Mr. Gillette and Mr. Webster. January 4, 1900, the petition herein was filed to have the firm of Gillette & Prentice adjudged bankrupts. The indebtedness herein, is a note of $2,300 due and owing by Gillette & Prentice as partners.

It is insisted on the part of the Bank of Batavia that it accepted the sum of $4,000 to apply on an individual note of Gillette, in the ordinary course of business, and without any knowledge of the facts, and that the bank had no alternative; that, when payment of this note was tendered by the maker, it was obliged to accept such payment, and cancel and deliver up the note, as it did. It seems to me that the negotiations existing between the president of the bank and Gillette and Webster a few days before the petition herein to adjudicate Gillette & Prentice bankrupts was filed gave sufficient knowledge to the Bank of Batavia of the insolvency of Gillette & Prentice. The circumstances attending their negotiations give rise to more than a suspicion of possible insolvency. The bank had more than reasonable cause to believe that Gillette & Prentice were insolvent. The facts and circumstances of their financial condition were brought home to the bank, and the president of the bank sufficiently interested himself in the financial condition of the debtors to place himself in communication with other debtors and endeavor to effect a compromise. In re Eggert (C.C.A.) 102 F. 735, 4 Am.Bankr.R. 449. It follows that the Bank of Batavia is chargeable with that knowledge of the facts which such inquiries as its president made should reasonably be expected to disclose. In Re Conhain (D.C.) 97 F. 923, 2 Nat.Bankr.N. 148, the court said:

'Where a bank holds several notes of a bankrupt, and payments have been made within four months before the filing of the petition in bankruptcy, and after the petitioner became insolvent, and those payments have been so applied that one of the notes is left wholly unpaid, the bank cannot assume the position of an unpreferred creditor as to this wholly unpaid promissory note; for the prohibition contained in section 57g is not limited to the particular debt or chose in action on account of which a preference has been received, but it refers to creditors who have received a preference, and provides that the claim of such creditors shall not be allowed unless they surrender the preference received.'

The distinction between the Conhaim Case and the case at bar is that here the note paid was an individual obligation of Gillette, while the indebtedness claimed by the bank to be a provable claim is a promissory note made jointly by the alleged bankrupts. The money paid, however, to the bank was the proceeds of the partnership property owned by Gillette & Prentice; and such a transfer is fraudulent and void as to the creditors of the firm, unless the firm was at the time solvent, and sufficient property remained to pay the partnership debts. Menagh v. Whitwell, 52 N.Y. 146. The proceeds of the sale of partnership property, where an adjudication in bankruptcy is had, must be appropriated to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus is added to the assets of the individual partners. Section 5f of the bankrupt act. Proof of the claim of the partnership estate against individual estates, and vice versa, is permitted. Both the individual estates and partnership estate may be marshaled, so as to prevent preferences, and secure an equitable distribution of the property of the several estates. Section 5g. The transfer of the partnership interest by Prentice to Gillette does not deprive creditors of the right to hold partnership assets for payment of their claims; and creditors having claims against an insolvent debtor who is a member of a co-partnership cannot, where the debtor has been adjudicated bankrupt, receive dividends from partnership assets until the co-partnership creditors have been paid in full. In re Wilcox (D.C.) 94 F. 84, 2 Am.Bankr.R. 117. I am of the opinion that the payment of $4,000 to the bank was an unlawful preference, which gave to the Bank of Batavia a greater percentage of its debt against Gillette, as an individual, than any other creditor.

An important question in this case, however, and which was not presented to the special master, is whether the bank of Batavia, which has accepted and retains an unlawful preference, may petition to have the said Gillette &amp Prentice, from whom such unlawful preference was obtained, declared involuntary bankrupts. By section 59b of the bankrupt act...