In re Shaw

• Decision Date: 13 August 1925
• Citation: 7 F.2d 381
• Parties: In re SHAW.
• Court: U.S. District Court — District of New Jersey

7 F.2d 381 (1925)

In re SHAW.

District Court, D. New Jersey.

August 13, 1925.

David Bobker, of Newark, N. J., for petitioner.

Jakes J. Murphy, of Jersey City, N. J., in pro. per.

RELLSTAB, District Judge.

Cluett, Peabody & Co., a creditor of Arnold Shaw, the bankrupt, on December 11, 1922, obtained a chattel mortgage from Shaw to secure an antecedent debt. This mortgage was recorded the next day. On February 24, 1923, an involuntary petition in bankruptcy was filed against Shaw. The goods covered by the mortgage were sold free and clear of its lien, upon condition that the lien, if any, should attach to the proceeds.

The referee denied the petition of this company (hereinafter called petitioner) for the proceeds, holding that the mortgage was an avoidable preference within the meaning of the Bankruptcy Act (Comp. St. §§ 9585-9656). To constitute a preference under sections 60a and 60b of this act (Comp. St. § 9644), the following four elements are necessary: "`First, the transfer must be made from an insolvent person to a creditor; second, the effect of such transfer must be to enable one creditor to obtain a greater percentage of his or its debt than others in the same class; third, the creditor receiving it must have had reasonable cause to believe that the effect would be a preference; and fourth, the transfer must have been made within four months prior to the bankruptcy.'" Heyman v. Third Nat. Bank of Jersey City (D. C.) 216 F. 685, 686.

At the close of the testimony taken before the referee, he dictated a memorandum, in which he held that the burden was on the creditor to show that he was "not obtaining a preference over other creditors." Indeed, he went so far as to say that this showing must be beyond a reasonable doubt. The referee also said that he did not think "it is required that insolvency must actually exist at the time the preference is given."

In response to the petitioner's attorney's specific request that the referee determine that Shaw "was solvent or insolvent at the time the mortgage was given," the referee answered, "I think the burden of proof is upon you." To the attorney's response, "We have endeavored to show that he was solvent," the referee replied, "No; what I have held does not make it necessary to adjudicate upon that question." In so ruling, the referee clearly erred. The burden of proof on all the four mentioned elements is cast upon the trustee. Heyman v. Third Nat. Bank of Jersey City (D. C.) 216 F. 688, 689. See, also, Collier on Bankruptcy (13th Ed.) p. 1328, and cases cited under notes 302 and 303.

At the time of the first hearing on this review, I called attention to this erroneous attitude of the referee, and the case was remanded to permit the trustee to take further testimony, if he so desired. Additional testimony was taken, but this was confined to showing that on October 5, 1922, a little more than two months before the mortgage was obtained, another creditor of Shaw secured a judgment against him for about $158.05, and that, upon execution issued on such judgment, a sale of part of Shaw's goods was made on January 17, 1923. This was about six weeks after the petitioner's mortgage was executed. The record before me does not definitely show that this judgment was wholly paid, but the inference is that it was satisfied. In the referee's conclusions, filed subsequent to the taking of this testimony, he makes no reference to the burden of proof. After reviewing the testimony, he concludes:

"In this case it seems to me satisfactorily proven that the previous experience which the creditor had had with the bankrupt in taking extension notes, receiving some checks in payment thereof and others upon which payment was stopped, or the notes returned worthless, were sufficient to at least warn him that the bankrupt's credit was not good. In view of these experiences, I cannot see how the creditor could have relied upon the bankrupt's statement to R. G. Dun & Co. concerning his interest in the real estate. It would seem most unusual that with this equity he would permit his checks to be dishonored. The refusal of the claimant to extend further credit to the bankrupt is an indication to my mind that he was extremely doubtful of the bankrupt's financial responsibility. With all these circumstances before the chattel mortgagee, it seems to me that he was bound to go beyond a mere cursory examination to satisfy himself of the solvency of the bankrupt or that the bankrupt was entitled to further credit, and that the true situation would have been revealed by slight investigation. I am therefore constrained to deny the creditor's petition, and to permit the trustee to file a petition for the return of the $500 paid by the bankrupt on account of this mortgage."

Of the four stated requisites to constitute an avoidable preference, the fourth is established, and the second is not controverted.

As to the first and third requisites — (a) insolvency at the time of the execution of the mortgage, and (b) reasonable cause to believe that the effect of giving it would be a preference — the commercial relations of the parties within a reasonable time prior thereto, as well as the transactions resulting in the giving of the security, are material in reaching a conclusion. Shaw had been dealing with the petitioner for some time — the record does not show the period, even approximately. He had become behind in his payments. In 1922 his indebtedness to the petitioner grew from $232.09 on May 12th...