In re Sutherland Co., Inc.

• Decision Date: 30 October 1917
• Docket Number: 22192.
• Citation: 245 F. 663
• Parties: In re SUTHERLAND CO., Inc.
• Court: U.S. District Court — District of Massachusetts

245 F. 663

In re SUTHERLAND CO., Inc.

No. 22192.

United States District Court, D. Massachusetts.

October 30, 1917

Clinton Gowdy, of Springfield, Mass., for mortgagee.

Scott Adams, of Springfield, Mass., for trustees.

MORTON District Judge.

The Sutherland Company, which carried on a retail dry goods shop in Holyoke, was adjudicated bankrupt. Charles J. Holcomb filed with the referee a petition alleging that he held a mortgage for $4,000 on its stock in trade and fixtures, and praying that this mortgage might be declared a valid lien on the proceeds of said property, which had been sold by the trustees. The learned referee made an order granting the prayer of the petition, and the present review proceedings were taken by the trustees and certain creditors. The evidence is fully reported.

It is clear that the mortgage was arranged for the purpose of paying or securing Mrs. Holcomb's previous loans to the bankrupt, and that Holcomb so understood it. He testifies:

'Q. That is, if the Sutherland Company would give a mortgage for $4,000, which would secure your wife for the $3,000 then you would see that they had the extra $1,000? A. That was it.'

And again:

'The reason I got that $1,000 was to secure my wife for the $3,000.'

The transaction was not on its face carried out in exactly the way stated. Holcomb actually advanced $4,000, and, in accordance with the agreement between him and the mortgagor the latter immediately applied the loan to the payment of Holcomb's wife and brother. The mortgagee gains nothing by this indirection (Roberts v. Johnson, 151 F. 567 81 C.C.A. 47, 18 Am.Bankr.R. 132; Bank of Wayne v. Gold, 146 A.D. 296, 130 N.Y.Supp. 942, 26 Am.Bankr.R. 722); and the legal effect of what was done is, in my opinion, the same as if mortgages had been made directly to wife and to C. J. Holcomb. The brother, A. R. Holcomb, was not at any time a creditor of the company; and the payment to him was made on C. J. Holcomb's account. The latter acted in his wife's interest and his own in taking the mortgage.

As to the $3,000 paid to Mrs. Holcomb: The effect of the transactions was to give her a preference; and the decisive question is whether Mr. Holcomb, at the time when he took the mortgage, had reasonable cause to believe that the Sutherland Company was then insolvent. He was bound to draw such inferences as would naturally follow from the facts coming to his attention; and, where those facts would ordinarily excite suspicion as to solvency and cause inquiry, he is to be held to such knowledge as a reasonable inquiry would have furnished. Anything 'sufficient to excite attention and put a party on inquiry is notice of everything to which such inquiry would have led. ' In re Knopf (D.C.) 144 F. 245, 16 Am.Bankr.R. 433. See, too, In re Eggert, 102 F. 735, 43 C.C.A. 1 (C.C.A. 7th Cir.); Remington on Bkcy. (2d Ed.) Sec. 1409, collecting cases.

Holcomb knew that the debtor's business had been bad, that it owed the bank substantial sums, that it had been in pressing need of ready money for several months, and that it had repeatedly borrowed from his wife, sometimes in such small amounts as to indicate that it had little or no cash on hand. He evidently supposed that it had no property except the stock and fixtures in its store, which was the fact. He had been in the store before he took the mortgage, and was able to see, although he might not be able to value correctly, what that property was. The notice afforded by the transaction itself is not to be overlooked. It is common knowledge that a retail shopkeeper only mortgages his stock in trade and fixtures as a last resort, and that the immediate effect of doing so is to destroy all further credit. If the mortgagor has other substantial debts and no other property, and these facts are known to the mortgagee, as they were in this instance, there is ample cause to excite his suspicion and to put him on his inquiry. Walbrun v. Babbitt, 16 Wall. 577, 21 L.Ed. 489; Remington on Bkcy. (2d Ed.) Sec. 1496. The question how the mortgagor expects to pay his other creditors after having mortgaged all his property to one, can hardly fail to suggest itself. Holcomb made no inquiry whatever, and did not even ask the mortgagor for a statement of financial condition. Reasonable investigation on his part would have disclosed that the Sutherland Company was insolvent, that the mortgage would work a preference, and would probably cause bankruptcy.

It is clear that Mr. Holcomb himself was not free from suspicion as to the validity of the transaction. He states his position as follows:

'I knew he (Sutherland) was pressed for money to meet his obligations; when I took that mortgage and raised that $1,000 I understood the bank was willing to carry this other money, and that if I could help them (the Sutherland Company) raise money enough to float along until they could (do) better, that they would be able to pull through and everything would be all right. I never thought there would be any trouble. If I had, I should not have raised the $1,000 for them. From what I heard up to the bank they was willing to let what they had lay. ' (Transcript, page 92.)

His inquiry of his attorney, Mr. Snow, who drew the mortgage whether a mortgage for cash was good is significant. The doubt which led to it obviously was whether such a mortgage...