In re E.T. Russell Co., Inc.

• Decision Date: 29 June 1923
• Docket Number: 29018.
• Citation: 291 F. 809
• Parties: In re E. T. RUSSELL CO., Inc.
• Court: U.S. District Court — District of Massachusetts

291 F. 809

In re E. T. RUSSELL CO., Inc.

No. 29018.

United States District Court, D. Massachusetts.

June 29, 1923

[Copyrighted Material Omitted]

Johnson Clapp, Ives & Knight, of Boston, Mass., for petitioning creditors.

Barton & Harding, of Boston, Mass., for attaching creditor.

BREWSTER District Judge.

This involuntary petition in bankruptcy is being contested by a creditor holding an attachment on bankrupt's property which will be dissolved by operation of the bankruptcy laws if adjudication is ordered upon the petition. The contest centers around the alleged acts of bankruptcy and the right of the petitioning creditors to avail themselves of certain of these acts.

The acts of bankruptcy alleged fall into three classes, as defined by the statute:

(1) That the bankrupt transferred, while insolvent, a portion of his property to certain of his creditors with intent to prefer such creditors over his other creditors.

(2) That the bankrupt suffered or permitted, while insolvent, a creditor to obtain a preference through legal proceedings and not having, at least five days before a sale or final disposition of the property affected by such preference, vacated or discharged such preference.

(3) That bankrupt made a general assignment for the benefit of its creditors.

The question of adjudication was referred to a special master, who has rendered his report, and the question of adjudication is now before the court upon the master's report, with a transcript of the testimony.

The alleged bankrupt is a Massachusetts corporation and was engaged in the business of packing and selling sardines. Its principal office is in Boston, Mass., and it has a plant in Maine, consisting of factory building, storehouse, wharves, four cottages or camps, and 12 acres of unimproved land. It also owns a fishing steamer, a motor vessel, a small two-masted schooner, four seines, and one seine boat. On July 6, 1921, the date of the filing of the petition in bankruptcy, it had on hand about 12,000 cases of sardines, packed in the season of 1919, of various grades and qualities, 90 per cent. of which were pledged to secure creditors. A fair valuation of these assets as of July 6, 1921, would not exceed $90,000, and an appraisal based upon replacement values would have shown these assets to be worth not over $123,000. The total liabilities were not less than $135,000.

The bankrupt seems to have been a one-man corporation. Its president and general manager owned a controlling interest in the common stock, nominated the board of directors, and had the entire control and management of the business and affairs of the corporation, and whatever was done in respect to the disbursement of moneys of the corporation was done under his direction. The plant had not been operated since 1919. It would have taken at least $50,000 to finance the necessary purchases and expenditures incident to a renewal of operations at the packing plant. All attempts to secure additional capital had failed. This was the state of affairs confronting the manager during the four months preceding the filing of the petition; yet, notwithstanding, the president and general manager on several occasions gave expression to his belief that the company was entirely solvent and that he would be able to pull it out of its difficulties and pay its creditors. The master finds that this belief was based on an unwarranted hope that the price of the product would advance sufficiently to enable the company to continue in business; that, judged by the standards of an ordinary and reasonable business man, the president should have known that in the then condition of the sardine market he could not raise sufficient money to commence operations; and that the assets, so far as the bankrupt was concerned, had only a liquidation value, and consequently that the company was insolvent.

While continuing the business, and within four months prior to the filing of the petition in bankruptcy, the bankrupt made certain payments of comparatively small amounts, and it is these payments which the petitioning creditors rely upon as transfers of property with intent to prefer. In respect to these payments I find the following facts:

(a) Robert A. Boit & Company of Boston:

On March 6, 1921, the bankrupt owed this creditor for premiums on outstanding insurance $1,241.74. The creditor was an insurance broker, and acted as such in procuring policies of insurance for the bankrupt. To avoid cancellation of the policies for nonpayment of premium, bankrupt agreed to pay creditors certain weekly installments. A few payments were made according to agreement; then a modified agreement was entered into for weekly payments of a smaller amount. Between March 6 and July 6 bankrupt paid the broker sums aggregating $609.20, and between the same dates the broker had procured renewals on expiring policies, the premiums upon which aggregated $1,800.

(b) H. H. Fisher:

This creditor was engaged in a teaming business, and had done teaming work for the bankrupt for a considerable period of time. The work consisted in moving cases of sardines sold to customers of the bankrupt. In accordance with the custom that had prevailed, bills were rendered the 1st of each month for teaming done during the previous month, and these bills were paid in the ordinary course, except for the work done during the month of June, for which the bankrupt owed $7.50. On March 6, 1921, the bankrupt owed $18.25 for February teaming.

(c) Boston Towel Supply Company:

This creditor furnished clean towel service to the bankrupt's office in Boston. It presented its bill to the bankrupt the early part of each month for clean towel service during the preceding month. These monthly bills were paid on presentation, except the bill for service during June, amounting to $2.95, which the bankrupt owed this creditor on July 6, 1921. On March 6, 1921, it owed the creditor the same amount for February service.

(d) Thomas Groom & Co.:

This creditor conducts a stationery store in Boston. Bankrupt had a charge account with this creditor, and the latter rendered about the 1st of the month a bill covering goods sold during the preceding month. On March 6 the bankrupt owed this creditor $2.95 for purchases during February, which was paid March 8. On April 13 it paid $7.45 for merchandise purchased during the month of March, and on May 18 it paid this creditor 35 cents for merchandise purchased during April. On July 6, 1921, bankrupt owed this creditor nothing.

(e) Clarence B. Mitchell:

Mr. Mitchell was the president and general manager of the company. He often used the treasury of the bankrupt as a bank of deposit and draft; that is to say, he paid over to the bankrupt checks which came in for his personal account and gave the bankrupt's check in payment of his own personal obligations. During the four months preceding the filing of the petition there was paid out to Mitchell, or for his account, by the bankrupt, sums aggregating $1,101.32, and during the same period there was credited to Mr. Mitchell's account amounts aggregating $3,047.08, representing cash $47.08, and six months' salary accruing since December 31, 1920, $3,000.

(f) Finance & Guaranty Company of Baltimore:

This creditor held sardines pledged to secure loans of interest at the rate of 1 1/2 per cent. per month. The practice under which the accounts between the parties were settled was as follows: The pledgee billed to the bankrupt each month the interest and charges during the preceding month, and the bankrupt made payments on the 10th of the month during which the statement was received. The interest and charges during the month of February amounted to $347.76, and were paid March 21, 1921. The interest and charges accruing during the month of March, 1921, were $312.03, and were paid April 18, 1921. The bills for interest and charges during May and June were not paid. The value of the collateral at then current market prices exceeded the amount of the indebtedness when these payments were made.

(g) George J. Jacques:

On May 18 the bankrupt had in his possession bills rendered by this creditor for job printing done for the bankrupt amounting to $20.25, and on that day these bills were paid.

The payments referred to in subparagraphs (a), (b), (c), and (d) were made in the usual course of the business which the bankrupt was endeavoring to continue. They were incidental to the maintenance of a principal office and the sale of bankrupt's products. If it should be deemed that those payments effected a preference, which is a matter of some doubt (In re Douglas Coal & Coke Co. (D.C.) 131 F. 769; In re Perlhefter (D.C.) 177 F. 299), the circumstances are such that no presumption would arise that in making them the bankrupt intended a preference (In re Freeman Cotting Coat Co. (D.C.) 212 F. 548; In re Gilbert (D.C.) 112 F. 951; In re Stovall Grocery Store (D.C.) 161 F. 882.

The payment referred to in subparagraph (f) to the Finance & Guaranty Company cannot be deemed preferential, because of the finding that the security held by the creditor exceeded the amount of the indebtedness secured.

The payments referred to in subparagraph (e) to the president cannot, in view of the rule laid down in this district in Re Henry C. King Co. (D.C.) 113 F. 110, be regarded as a preference.

This leaves only the payment of Jacques of $20.25, subparagraph (g). This payment was clearly preferential, but in view of the facts surrounding the payment, the small amount involved and the expectation of the president, although unwarranted that bankruptcy might be avoided, I am unable to find that this payment alone constituted an act of bankruptcy. In re Columbia Real Estate Co. (D.C.) 205 F. 980; In re...