In re Klein

• Decision Date: 26 June 1912
• Docket Number: 2,134.
• Citation: 197 F. 241
• Parties: In re KLEIN. v. FIRST NAT. BANK OF CANTON, OHIO. DOUGHERTY
• Court: U.S. Court of Appeals — Sixth Circuit

197 F. 241

In re KLEIN.

DOUGHERTY v. FIRST NAT. BANK OF CANTON, OHIO.

No. 2,134.

United States Court of Appeals, Sixth Circuit.

June 26, 1912

In March, 1905, the bankrupt, Klein, an experienced hotel keeper, leased a large hotel at Canton, Ohio, for $8,200 for the first year and an increased rental thereafter of $1,200 per year until the maximum of $13,000 was reached. After equipping it anew in an elaborate manner, he opened it for business on October 17th. In his evidence he fixed his investment at about $50,000. Its exact amount is uncertain but, not including certain necessary expenditures incident to fitting and opening the hotel, he expended $20,500 of his own funds, and $10,000 borrowed of the First National Bank, of Canton, with which he did his banking business. On December 14th he borrowed on the note of himself and his father-in-law, Clayson, $6,000, for which the latter pledged certain bank stock. Klein's evidence tends to show that this sum was used in connection with the hotel. In October 1906, he represented to Loichot, the bank's cashier, as he did on different occasions to others, his investment to be between $60,000 and $65,000, and his entire indebtedness between $35,000 and $36,000-- being $10,000 due the bank about $11,000 (including the $6,000 above mentioned) to Clayson, about $4,000 to the William Edwards Company, his principal merchandise creditor, and, including certain unpaid rent about which there was a dispute, about $10,000 to various small creditors, and requested an additional $5,000 loan, to be applied on such last-named debts, the residue of which he proposed to pay out of the profits of his business which he fixed at about $1,000 per month. Having submitted a list of his assets and liabilities, Loichot personally inspected his books and the hotel equipment, with which he had some acquaintance and by whose elegance he was impressed, and checked up not only the greater part of the listed liabilities, which were found to be correct, but also the invoices and bills of cost, which, in so far as submitted, aggregated a sum between $40,000 and $45,000. The bank suggested that it furnish $3,000 and Clayson $2,000 of the desired loan, but the latter, not being in funds, an agreement was made that the bank should loan the $5,000, a note for $2,000 of which should be indorsed by Clayson, and that Klein should give the bank a chattel mortgage on his hotel belongings to secure both the original $10,000 and the new $5,000 loan, and a second mortgage on the same property to Clayson and the William Edwards Company, which, through a representative and attorney, was asking for security, to secure the former's claim of $11,708 and the latter's of $4,184.95. The mortgages were executed and delivered on October 29th, $1,500 of the new loan being applied in the payment of two of Klein's notes-- one made to a third party and discounted by the bank, and another left at the bank for collection. After delivery of the mortgages, Klein requested that they be not then filed, because he was negotiating the sale of his property, and feared that their filing would reduce the price otherwise obtainable. The only reason assigned at any time for selling was insufficiency of capital for his business. If he sold, he proposed to liquidate all his debts. It was thereupon agreed between him and his mortgagees that Loichot should take possession of and withhold both mortgages from the files, so long as he saw fit, pending negotiations for the sale of the property, and that, when he filed the bank's he should also thereafter file the other. Negotiations for a sale continued with various parties almost to the time Klein went into bankruptcy. Loichot's making of the loan and withholding of the mortgages from the files had the approval of Lynch, a lawyer and a director of the bank, whose advice was sought, however, in the capacity of a director only. Loichot believed Klein's statements regarding his liabilities, profits, and cost and value of his property to be true, and that Klein had a large equity in the property mortgaged over and above his liabilities. He did not know that Klein was insolvent or unable to pay his debts, or that they would not be paid in full on account of the bank obtaining the mortgage. Klein reported to Loichot on different occasions his negotiations for the sale of the property, at prices ranging from $50,000 to $60,000, but in October or November, 1907, Loichot learned of an offer of it for $40,000. Klein on different occasions also made statements to Loichot as to his business, which showed for some months a loss, and for others a profit varying from $500 to $1,500 per month. He reported that he was paying off his unsecured creditors out of the hotel earnings, and in the fall of 1907, that his patronage was increasing and his business doing well, which Loichot's observations in August and September tended to confirm. Klein paid the interest on the bank's mortgage, but no part of the principal. In September of that year, a representative of Klein's landlord informed Loichot that Klein was behind in his rent, but did not say how much, or when he became so, or that the arrearage was other or greater than that which existed when the mortgages were given, and says that he and Loichot discussed the advisability of inducing Klein to sell out at a reasonable and fair price and agreed to co-operate in that direction, but no price was named. Excepting his unpaid rent, Klein paid his unsecured debts contracted prior to the execution of the mortgages. Subsequent thereto and prior to their filing he incurred other liabilities for merchandise, rent, etc., in an amount somewhat difficult to determine, but approximately from $12,000 to $14,000. We assume that his debts for labor and otherwise entitled to priority (including $384 for taxes), amounting to about $2,604, in the absence of dates of their incurring, and from their character and (save one) their smallness, arose after the filing of the mortgages. Within such subsequent period he also incurred merchandise and other debts of several thousand dollars. On October 17, 1907, feeling that Klein had had sufficient time to make some substantial payment on his indebtedness to the bank and that there was no immediate prospect of his reducing it, Loichot, who had not conversed with Klein about his affairs for about a month, of his own accord filed the bank's mortgage and then that of Clayson and the William Edwards Company. Klein had told him on different occasions after the mortgages were given, that he was making money, had been paying off his old debts and would soon be in read Harold Remington, of New York City (Clarke & Clarke, on the brief), for appellant.

A. V. Cannon, of Cleveland, Ohio, and Austin Lynch, of Canton, Ohio (Lynch & Day, of Canton, Ohio, on the brief), for appellee.

Before WARRINGTON and KNAPPEN, Circuit Judges, and SATER, District judge.

SATER District Judge (after stating the facts as above).

The case is here both on appeal and on a petition for review. As no objection is made touching the remedies so chosen to bring the matters in controversy into this court, we need not concern ourselves with any question of remedy or jurisdiction. Re Martin, 193 F. 841 (C.C.A. 6).

The trustee in bankruptcy, to maintain his contention that the bank's mortgage is invalid as against him as the representative of the bankrupt's creditors, advances the following propositions:

(1) The chattel mortgage transferred to the bank the whole of Klein's property when he was insolvent and when the bank had reasonable cause to believe that a preference was thereby intended to be given to it, in consequence of which the bank, if the mortgage be upheld, will receive, in the order of priorities prescribed by the bankruptcy statute, a greater percentage of its claim than other creditors of the same class. The mortgage, therefore, constitutes a preference whether the date of the transfer be considered as of the date of the execution or of the filing of the mortgage.

(2) The bank is conclusively estopped from claiming against him under such mortgage, because the mortgage, in pursuance of a concerted plan and positive agreement, was withheld from record for almost a year, on account of which others were disposed to give and did give Klein credit between the date of the execution and of the filing of such instrument.

(3) The bank's mortgage, considered in conjunction with that of Clayson and the William Edwards Company, which was given at the same time, and with its withholding from record in pursuance of an agreement which contemplated the effect such withholding would have on the debtor's financial standing, was taken for the purpose and with the intent of hindering and delaying his other creditors.

These propositions are all controverted by the bank not only as to the conclusions of fact adduced from the evidence, but as to the law applicable to the case. The transactions involved occurred when sections 60a and 60b of the Bankruptcy Act (Act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3447)), as amended February 5, 1903 (Act Feb. 5, 1903, c. 487, 32 Stat. 799 (U.S. Comp. St. Supp. 1911, p. 1506)), were in force.

Whether the mortgage to the bank constituted a preference or not at the time it was given must be determined by the facts and circumstances then existing. The situation was such as to beget confidence in Klein and in his ability to pay his creditors in full. As the bank was not urging payment of its original $10,000 loan, and as it from the first considered favorably his application for an increased accommodation, it must be presumed that his business relations with it for the preceding year had been satisfactory. There is no suggestion in the...