In re Hawks

• Decision Date: 16 April 1913
• Citation: 204 F. 309
• Parties: In re HAWKS.
• Court: U.S. District Court — District of Kansas

204 F. 309

In re HAWKS.

United States District Court, D. Kansas.

April 16, 1913

[Copyrighted Material Omitted]

The Allen-West Commission Company, referred to hereinafter as the Commission Company, presented its claim against the bankrupt estate, amounting to $254,490.40, after allowing all credits which it claims the bankrupt is entitled to.It also claimed a lien on certain realty of the bankrupt, which the bankrupt had conveyed by mortgage for the purpose of securing any and all indebtedness due from him to the Commission Company, and asked that, after applying the proceeds from the sale of the mortgaged premises, the balance due be allowed as an unsecured claim.The referee directed the mortgaged lands to be sold free from all liens, and that the proceeds be held pending the determination of the validity of this claim, the allowance of which was objected to by the trustee.The sum realized from the sale of the mortgaged lands amounts to $15,655, and is held subject to final determination of this claim.The original objections filed by the trustee are:

(1) Because the Commission Company holds two life insurance policies, for $5,000 each, on the life of the bankrupt, which were assigned to it as collateral security.

(2) Because a note of $2,500, indorsed by Joseph and Amanda Dudgeon, is barred by the statute of limitations.

The third and fourth objections are that there are included in the account charges for insurance on cotton consigned by the bankrupt to the Commission Company, and also for weighing and sampling the same, without authority of law.

(5) That the Commission Company charged 8 per cent. interest per annum on the account, and compounded it annually, without any agreement in writing therefor.

At a later day additional objections were filed by the trustee which, for convenience, will be numbered consecutively with the original objections:

(6) That on the 1st day of August, 1899, the bankrupt being indebted to a large number of persons, including the Commission Company, the bankrupt entered into a composition agreement with his creditors, whereby the creditors agreed to accept 40 per cent. of their respective debts, which was also signed by the Commission Company; but that a secret agreement was entered into between the bankrupt and the Commission Company, whereby he promised to pay the Commission Company its debt in full, and executed his notes therefor, which notes constitute a part of the indebtedness now claimed.That these accounts are fraudulent, and should be deducted from the account, if the same is allowed.

(7) That by reason of this fraud the entire claim of the Commission Company should be disallowed.

(8) That the Commission Company was guilty of fraud ever since 1899, by willfully suppressing the fact that the bankrupt was all the time insolvent, and aided him in maintaining a false credit, whereby he was aided to become indebted to the other creditors.

It was also claimed that one of the items was a $2,500 note executed in 1899, which was included in the account when it became due, and interest thereon charged at the rate of 8 per cent per annum after maturity, although it was only to bear interest at the rate of 6 per cent. per annum.

Some of the items objected to were abandoned.The surrender values of the life insurance policies held by the Commission Company were credited on the amended account, and the overcharge of the interest on the $2,500 note, amounting to $317, was also credited on the account, thus eliminating objections numbered 1, 2, 3, and 4.

There was a great deal of testimony taken by the parties, including almost the entire correspondence between the bankrupt and the Commission Company during the entire period of their dealings, commencing in 1899 and continuing to the date of the adjudication in bankruptcy, the latter part of 1910.The referee disallowed the entire claim, upon the finding made by him that there was co-operation and confederation between the Commission Company and the bankrupt to conceal the true condition of the business and the insolvency of the bankrupt, which was known to the Commission Company; the referee holding, 'Without it (meaning the co-operation and confederation between the parties) it was impossible for the bankrupt to have obtained any rating whatever in commercial circles,' and that therefore the Commission Company was guilty of such fraud as to justify the rejection of its entire claim.

To review this order the Commission Company has brought the case before this court for review.

Lyon & Swarts and Dwight D. Currie, all of St. Louis, Mo., for trustee.

Moore, Smith & Moore, of Little Rock, Ark., for claimant.

TRIEBER, District Judge(after stating the facts as above).

Counsel for the trustee, in their briefs and oral argument, contended that the findings of the referee, especially in view of the fact that some of the testimony was taken in his presence, a considerable part having been taken before another referee, who has since died, should be given the same effect as the verdict of the jury, and, if there is any substantial evidence to sustain his findings, the court should not set them aside.The rule thus stated is too broad.The correct rule is that the findings of fact made by a referee in bankruptcy are presumptively correct, and unless they are clearly against the weight of the evidence, or some obvious error of law has intervened in its application, will not be disturbed; but they are not conclusive, as is the verdict of a jury, or the findings of facts made by the judge in an action at law when a jury has been waived.This is the rule of law applicable to masters in chancery, and is equally applicable to findings made by a referee in bankruptcy.Southern Pine Co. v. Savannah Trust Co.,142 F. 802, 73 C.C.A. 60;Houck v. Christy,152 F. 612, 614, 81 C.C.A. 602, 605;Ohio Valley Bank v. Mack,163 F. 155, 158, 89 C.C.A. 605, 608, 24 L.R.A. (N.S.) 184.

This necessitates an examination of the voluminous evidence taken in the case, for the purpose of determining whether the findings of facts made by the referee are clearly against the weight of the evidence, or whether some obvious error of law has intervened in the conclusions reached.There is little conflict in the evidence, and the referee's findings are practically based entirely on his views of the law applicable to the issues involved.In the argument before the court, counsel presented their views on the whole case, and treated the case, and the court will treat it, as tried de novo, but giving the findings of facts made by the referee that weight to which they are entitled under the rule of law hereinbefore stated.

It is claimed on behalf of the trustee that the composition agreement entered into in August, 1899, whereby the Commission Company was to be paid in full, while the other creditors were to receive only 40 per cent. of the amounts of their respective claims, although the Commission Company signed the composition agreement, whereby it obligated itself to accept 40 per cent. of its claim, the same as the other creditors, was such a fraud as vitiates the entire indebtedness, or at least warrants an abatement of that much of its claim.The undisputed evidence shows that at the time this composition agreement was made the bankrupt did not have the money to pay the creditors the sum of money due them under the agreement; that he thereupon entered into an agreement with the Commission Company to the effect that, if it would advance the money needed to pay these debts, he would pay its debts in full.The Commission Company did not sign the composition agreement until all the other creditors had signed it.This agreement to pay the Commission Company's claim in full was not made known to the other creditors; but there is no evidence whatever to show that there was any fraudulent concealment, or any fraud practiced upon the other creditors, nor are any of these creditors making any objections now.Numerous authorities have been cited by counsel for the trustee that this agreement was a fraud on the other creditors; but in view of the late decision of the Supreme Court of the United States in Zavelo v. Reeves,227 U.S. 625, 33 Sup.Ct. 365, 57 L.Ed. . . .(opinion filed February 24, 1913), this contention cannot be sustained.In that caseMr. Justice Pitney, who delivered the unanimous opinion of the court, said:

'It is certain, however, that a discharge, while releasing the bankrupt from a legal liability to pay a debt that was provable in the bankruptcy, leaves him under a moral obligation that is sufficient to support that promise to pay the debt.And in reason, as well as by the great weight of authority, the date of the new promise is immaterial.The theory is that the discharge destroys the remedy, but not the indebtedness; that, generally speaking, it relates to the inception of the proceedings, and the transfer of the bankrupt's estate for the benefit of creditors takes effect at the same time; that the bankrupt becomes a free man from the time to which the discharge relates, and is as competent to bind himself by a promise to pay an antecedent obligation, which otherwise would not be actionable because of the discharge, as he is to enter into any new engagement.And so, under other bankrupt acts, it has been commonly held that a promise to pay a provable debt, notwithstanding the discharge, is as effective, when made after the filing of the petition and before the discharge, as if made after the discharge.'

The facts in that case were that the defendant had been adjudicated a bankrupt; that subsequently he offered a composition to his creditors, and the offer was accepted, and a composition made in said proceedings and duly confirmed by the...