In re Macklem

• Decision Date: 02 November 1927
• Docket Number: No. 5082.,5082.
• Citation: 22 F.2d 426
• Parties: In re MACKLEM.
• Court: U.S. District Court — District of Maryland

22 F.2d 426 (1927)

In re MACKLEM.

No. 5082.

District Court, D. Maryland.

November 2, 1927.

Lee I. Hecht, of Baltimore, Md., for petitioning creditors.

E. H. Young, of Baltimore, Md., and John S. Young, of Bel Air, Md., for defendant.

COLEMAN, District Judge.

This case arises upon an involuntary petition for an adjudication of bankruptcy, and an answer thereto which asserts that the individual sought to be so adjudicated is exempt by virtue of section 4b of the Bankruptcy Act (11 USCA § 22), because a farmer.

The petition was filed August 22, 1927, against John W. Macklem by three creditors, the Havre de Grace Banking & Trust Company and two individuals. It alleges that Macklem is a canner of corn and tomatoes, is insolvent, and within four months preceding the filing of the petition, namely, on August 9, 1927, committed an act of bankruptcy, in that he then made a deed of trust of all his property for the benefit of creditors. The petition is otherwise sufficient on its face. Macklem, in his answer, denies that he is a canner, and alleges, first, that he is a person chiefly engaged in farming or tilling of the soil, and thus exempt; second, that the petitioning creditors have been preferred within four months of the filing of the petition, and are therefore disqualified; and, third, that one of these creditors, the Havre de Grace Banking & Trust Company, is estopped from filing the petition, because it endeavored to induce the respondent to make a general assignment to it, or its nominee, for the benefit of his creditors.

Taking up first the question of estoppel, it seems clear that this is entirely without merit. There is evidence that the secretary of the Havre de Grace Banking & Trust Company, together with the president of another creditor bank, proposed to respondent that he might best get back "on his feet" by appointing them a committee, temporarily, to mange his affairs. But there was nothing improper in this, or nothing inconsistent with the trust company's present position.

As to the matter of disqualification of the three petitioning creditors, Bankruptcy Act, § 59b (11 USCA § 95), provides that "three or more creditors who have provable claims against any person * * * may file a petition to have him adjudged a bankrupt." Under some of the decisions, "provable" is held to mean any claim which might be proved, whether preferred or not; while other cases hold that it is the equivalent of "allowable." See In re Standard Detroit Tractor Co. (D. C.) 275 F. 952, 954. But the weight of authority is that a creditor, who has received a voidable preference, may still join in the petition, though he may not be counted as one of the required three petitioning creditors, unless he surrenders his preference. Stevens v. Nave-McCord Co. (C. C. A.) 150 F. 71; In re Gillette (D. C.) 104 F. 769; Canute S. S. Co. v. Pittsburg Coal Co., 263 U. S. 244, 44 S. Ct. 67, 68 L. Ed. 287; In re Cooper (D. C.) 12 F.(2d) 485. As was said in the Stevens Case, page 76:

"The evil of preferences which the bankrupt law was enacted to remove, the remedy of an equal distribution of the property of the bankrupt which it was passed to provide, the prohibition of the use of their claims by preferred creditors until they surrender them, which the act contains, the general scope of the law and all its provisions read and considered together, and the duty to give to it a rational and sensible interpretation, have forced our minds to the conclusion that it was the intention of Congress that creditors who hold voidable preferences should not be counted either for or against the petition for an adjudication in bankruptcy until they surrender their preferences. This intention, thus deduced, must therefore prevail over the technical rules of construction which counsel for the appellees invoke. The result is: A creditor who holds a voidable preference has a provable claim in the sense that he may make and file the formal proof thereof specified by the bankruptcy law; but he may not procure an allowance of his claim, he may not vote at a creditors' meeting, and he may not obtain any advantage from his claim in the bankruptcy proceeding before he surrenders his preference.

"Such a preferred creditor may present or may join in a petition for an adjudication of bankruptcy. But he may not be counted for the petition unless he surrenders his preference before the adjudication. In re Hornstein (D. C.) 122 F. 266, 273, 277; In re Gillette (D. C.) 104 F. 769."

The question, therefore, becomes whether the petitioners, or any of them, have received voidable preferences, there being only the minimum number of petitioning creditors, three. The preferences alleged in the answer are that on May 2, 1927, Macklem paid to one of the individual petitioners $59 on account, and on July 11, 1927, to the other individual petitioner $133.59 on account; these petitioners knowing Macklem was then insolvent. As to the third petitioner, the Havre de Grace Banking & Trust Company, the claim is that it was preferred by the payment on July 16, 1927, of a note for $206.20, dated May 6, 1926, and also by payment of interest about the same time on another note which it held for $10,000.

The court does not think that any of these payments can be called preferences. It does not appear that the debtor was actually insolvent at the times the payments were made. True, he was in financial difficulties; but that is not the equivalent of insolvency. Indeed, on July 5, 1927, 11 days prior to the last payment, at a meeting of the directors of the Havre de Grace Banking & Trust Company, it was their opinion, after examining Macklem's assets and liabilities, that he was not then insolvent. But the intent of the creditor to whom the alleged preferential payment is made is not material. It is the intent of the debtor that controls. In re Truitt (D. C.) 203 F. 550. Macklem seems to have had no intent to prefer the parties paid, over his other creditors; also payments of currently maturing liabilities in such comparatively small amounts as these are probably not preferential payments in any event. In re Columbia Real Estate Trust Co. (D. C.) 205 F. 980; Houchin Sales Co. v. Angert (C. C. A.) 11 F.(2d) 118.

The real point in the case, then, is narrowed down to the single question of whether Macklem was a farmer or tiller of the soil. This is a question of fact, to be decided upon the circumstances presented by each case. In re Driver (D. C.) 252 F. 956; In re Sutter (D. C.) 270 F. 248; In re Brais (C. C. A.) 15 F.(2d) 693. Whether he is exempt must be determined by consideration of the relative importance of all of his activities at the date of the act charged as an act of bankruptcy. In re Disney (D. C.) 219 F. 294; In re Brown (C. C. A.) 253 F. 357; In re Brown (D. C.) 284 F. 903. The burden of proving that he is not within the exempt class is upon the petitioning creditors. In re Brais, supra; Smith v. Bank of Brownsville (C. C. A.) 15 F (2d) 792.

With this outline of the legal considerations to be borne in mind, the facts now must be analyzed. Mr. Macklem's father had operated the cannery here involved for a number of years prior to his death in 1924. Thereupon the son took over the business. He greatly improved and enlarged the plant in 1925, preparatory to the canning season of that year. He owns two farms, and a 10-acre tract upon which his house is situated. His sisters own three farms, upon one of which the canning factory is situated. Up to and including the year 1925, all five farms were devoted almost exclusively to the raising of sugar corn, all of which was destined for the canning factory. In addition, outside corn crops were purchased. The business had an increasing output till it reached its peak in 1925, with a pack of 50,000 cases, a large production. Since then the factory has not been operated. The major portion of this pack was not disposed of in 1925; the respondent testifying that only 8,000 or 10,000 cases were sold then. With about 40,000 cases on hand at the opening of 1926, Macklem naturally made no preparations to can that year, and so testified, there being no market for what he already had on hand. At the beginning of 1927, due to general overproduction, he still had unsold 17,000 or so cases, which were disposed of in various lots, till at the date of the deed of trust, August 9, 1927, there were 5,600 left.

His farming activities during 1926 and 1927 were as follows: One of his farms was let to a tenant on shares, who had been there a number of years, engaged solely in raising sugar corn, all of which went to the cannery. It contains 118 acres, 30 acres of which have been under cultivation for the last two years. The other farm, of 122 acres, is in charge of a tenant, who has been upon it for 10 years. In 1926, 18 acres of it were planted in corn and tomatoes, and about the same acreage was under cultivation in 1927. The 10-acre home site was not cultivated in either year, though hay crops have been cut periodically. Of the sisters' three farms, aggregating about 700 acres, he had only a half interest in 61 acres, which are part of the 200-acre farm on which the sisters live, and which Mr. Macklem cultivates. He had no interest in the other two farms. He acted as overseer for them, but without compensation. They were cultivated by tenants secured by him. It appears, therefore, that out of nearly 1,000 acres of land, for the past two years, he has had a financial interest in little more than 100 cultivated acres. Nevertheles...