In re Hunter-Rand Co.

• Citation: 241 F. 175
• Decision Date: 21 March 1917
• Docket Number: 537.
• Parties: In re HUNTER-RAND CO. Petition of ARMSTRONG, CATOR & CO.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

241 F. 175

In re HUNTER-RAND CO. Petition of ARMSTRONG, CATOR & CO.

No. 537.

United States District Court, E.D. North Carolina.

March 21, 1917

John W Hinsdale, of Raleigh, N.C., for creditors.

J. C Little, of Raleigh, N.C., for trustee.

CONNOR District Judge.

The referee found the following essential facts:

On several dates between March 28, 1916, and April 25, 1916 inclusive, the bankrupt, a mercantile corporation, conducting its business in Raleigh, N.C., ordered and received from petitioners, Armstrong, Cator & Co., wholesale merchants conducting business in the city of Baltimore, Md., goods and merchandise invoiced at the aggregate sum of $697.18. The goods were sold upon the usual terms in regard to credit prevailing in the trade. The largest invoice amounted to $299.15, April 18, 1916, and the smallest $3.60, March 31, 1916; the other invoices ranged between $215.01 and $21. The goods were received by the bankrupt in the usual course of business and trade, placed in its store, and mingled with its other stock. At the time the sales were made by Armstrong, Cator & Co., the Hunter-Rand Company owed debts amounting to $44,557.13 and had a stock of merchandise inventoried at $26,351.86, and accounts, which the managing officers thought 'collectible,' amounting to $14,934.41. At a 'forced sale' the goods were worth about 50 cents on the dollar. The amount 'collectible' on the accounts would not exceed $3,500.

'No evidence has been offered by Armstrong, Cator & Co. of any false financial statement made to it by the bankrupt, nor is there any evidence of fraud or deceit on the part of the bankrupt in connection with the above sales of goods on credit.'

The Hunter-Rand Company was adjudged bankrupt May 5, 1916. The portion of the goods purchased from Armstrong, Cator & Co., which had not been sold by the bankrupt, was received by the trustee, and was in his possession when this petition was filed. At cost they amount to $370.54.

The referee, upon the foregoing facts, found as conclusion of law that the goods were sold on credit, with open account; no false representations, as to financial condition, were made by the bankrupt, and there is no evidence whatever of any fraud; therefore the petitioners are not entitled to recover the goods identified in the hands of the trustee. The petition was dismissed.

Petitioners filed a petition for review, assigning as error the failure of the referee to find, as a fact:

'That Hunter-Rand Company, at the time of the purchase of the merchandise in question, knew that the said company was hopelessly insolvent, and that it purchased the said merchandise with no intention of paying for the same, and that there was no fraud on the part of the bankrupt in connection with the sale of the said goods on a credit; the petitioners having no information of such fact.'

Petitioners assign as error in the conclusion of law, that the referee held that petitioners were not entitled, on all of the evidence, to rescind the sale and reclaim the goods. There was no conflict in the testimony in respect to the conditions under which the goods were ordered and sold. While the referee did not specifically find that the managing officers of the bankrupt corporation knew its financial condition, it must, in the light of the evidence, be taken that they knew the amount and character of its indebtedness and its assets. While, in legal contemplation, this condition shows insolvency (that is, inability to pay its debts by the sale of its stock and collection of its credits), this is not determinative of the question upon which the right to rescind by the petitioners depends. The referee finds that, at the time the goods were received, and this is assumed to cover the entire period, March 21, 1916, to April 28, 1916, the Hunter-Rand Company was 'totally insolvent.' He evidently did not intend to find that it had no property applicable to the payment of its debts, but that it was unable to pay its debts in full, and in this condition of its affairs the corporation was insolvent.

Total insolvency would give a different coloring to the transaction. If one obtained property by promising to pay therefor at some future time, being 'totally' without any means of doing so, which fact he failed to communicate to the seller, in the absence of explanation, a strong presumption of an intention not to pay for it would arise, in a normal mind. The degree or extent of the insolvency of the purchaser constitutes an important factor in ascertaining his intention in regard to paying for property purchased on credit. The petition filed by Armstrong, Cator & Co. sets forth very clearly the basis of their claim to rescind the sale and reclaim the goods. They say, in substance, that on the dates named they 'sold and delivered' to the bankrupts the goods, at the prices named, set forth in the exhibits attached, being copies of the invoices; that at the dates of said sales the Hunter-Rand Company 'was hopelessly insolvent,' did not have sufficient assets to pay more than 20 per cent. of its indebtedness, giving petitioners' estimates of indebtedness and assets, which are substantially correct; that nothing occurred between the dates of the sales and the bankruptcy 'to explain or account for its being in a worse condition now than at the time the said goods were purchased; that under all these circumstances the bankrupt must have been aware of its condition when the said purchases were made, and that it was utterly impossible to pay its debts in full'; that petitioners were ignorant of these facts until the petition in bankruptcy was filed.

The question presented is interesting, and its correct decision not free from difficulty. The right of a party, who has been induced to enter into an executed contract by fraudulent representations, to invoke the equitable power of a court of chancery to cancel or rescind it, is of ancient origin and has well-defined limitations. The right to use, as a defense in an action at law brought for the enforcement of an executory contract, the fraud of the plaintiff, is also recognized, and within its limitations enforced. It has been said that fraud, which is available as a defense in such action, must be found in the factum; whereas, when the fraud against which relief is sought, is committed in the treaty or negotiation, a court of equity is the appropriate tribunal to grant relief. This is elementary, although it is sometimes uncertain upon which side the line of demarcation a given case falls. The distinction, with the jurisdictional line of division, is clearly pointed out and illustrated by Person, C.J., in Lee v. Pearce, 68 N.C. 76. Since the adoption, by many of the states, of the code system, wherein the distinction between actions at law and suits in equity has been abolished, and all actionable wrongs and legal and equitable remedies are administered in a civil action, the distinction has become of less practical importance, although in federal courts it still obtains.

A remedial fraud, without regard to the forum in which it is being dealt with, has been defined to be:

'A representation, expressed or implied, false within the knowledge of the party making it, reasonably relied upon by the other party, and constituting a material inducement to his contract or act. ' Adams, Eq. 176.

This definition, while for practical purposes it is accurate, yet leaves open many questions which have given the courts much trouble. Mr. Adams says:

'When no statement has been expressly made, a misrepresentation may nevertheless be implied from conduct. But mere nondisclosure is generally not equivalent to fraud.'

This, of course, involves the question whether disclosure of a fact, within the knowledge of the party charged with the fraud, the existence of which may reasonably be assumed to be unknown by the other party, is a legal duty, and this opens up a wide range of inquiry.

The principle upon which the right to recover the property is based is that, because of the fact that the defendant procured its possession, having no intention of paying the price, either at the expiration of the period of credit or at any other time, the title did not pass out of the owner and into the defendant. The principle is elementary, but its application to sales of personal property appears to be of modern origin, and its limitations not very clearly marked. Sir Frederick Pollock says:

'It has been said that it is not fraud to make a contract without any intention of performing it, because peradventure the party may think better of it and perform it after all; but this was in a case where the question arose wholly on the form of the pleadings in a highly technical and now happily impossible manner. Hemingway v. Hamilton, 1 M. & W. 115. Both before and since that time it has repeatedly been considered a fraud in law to buy goods with the intention of not paying for them. Here it is obvious that the party would not enter into the contract if he knew of the fraudulent intention; but the fraud is not so much the concealment, as in the character of the intention itself. ' Contracts (2d Am. Ed. Wald.) 512, 513.

The American editor cites in the note a number of American and English cases. Mr. Page says:

'When the promise is made, without any intent on promisor's part to keep it, but to induce action on the promisee, it is held in many jurisdictions to be fraud, on the theory that the intent of the party promising is a material fact. ' Page on Contracts, 102.

It is evident that some courts have adhered, rather too closely, to the language used in the older cases, and writers, that to constitute a remedial fraud there must be a false statement in regard to a fact, as distinguished from the...