In re Wright-Dana Hardware Co.

• Decision Date: 17 February 1914
• Docket Number: 166.
• Citation: 212 F. 397
• Parties: In re WRIGHT-DANA HARDWARE CO.
• Court: U.S. Court of Appeals — Second Circuit

212 F. 397

In re WRIGHT-DANA HARDWARE CO.

No. 166.

United States Court of Appeals, Second Circuit.

February 17, 1914

The Utica City National Bank, George S. Dana, and Robert L Kinne, on January 17, 1912, filed a petition for adjudication of bankruptcy against the Wright-Dana Hardware Company. The said company was duly adjudicated a bankrupt on February 5 1912. The Wright-Dana Company for a number of years prior to this adjudication of bankruptcy had kept an account and received accommodation by way of loans at the Utica City National Bank. Four months before the petition in bankruptcy was filed, or about the middle of September, 1911, the bank owned and held promissory notes, made and given by the company, of the face value of more than $14,000, and was likewise the owner and holder of several promissory notes on which the company was liable as indorser. Payments were made to the bank by the Wright-Dana Company on account of the principal and interest of these notes at the following times and in the following amounts:

1911
Dec. 18 Interest	$ 30 11
" 20 Principal	723 55
" 26 Principal ..................	376 45
" 26 Interest .......................	76
Oct. 7 Principal and interest .....	100 42
1912
Jan. 4 Interest ....................	48 77
" 8 Principal ..................	200 00
" 8 Interest .....................	1 27
Total ..............	$1,481 33

On January 10, 1912, the balance on the books of the bank to the credit of Wright-Dana Company was $52.69. Thereafter the following deposits were made by the company:

Jan. 11 ..	$109 55
" 13 ...	300 73
" 15 ...	166 07
" 16 ...	100 00
" 18 ...	271 42
" 19 ...	123 14
" 22 ...	174 81
" 24 ....	78 94
" 27 ...	220 29
" " .....	95 75
" 30 ...	121 36
Feb. 2 ...	132 33

Only one check was drawn by the company after January 10th against its balance on deposit in the bank, and that was one in the sum of $14.35. On January 16, 1912, the bank applied $639.04 of the deposit then standing to the credit of the company...

The court below allowed the set-offs made by the bank prior to January, 1912, and disallowed those made during January and subsequent thereto. The order of the court provided that the claims of the bank and of Robert L. Kinne against the company should not be allowed unless the bank should, within 10 days from the date of the order, pay over to the trustee in bankruptcy the sums appropriated by the bank after it had reasonable cause to believe its appropriation would effect a preference in its favor, viz., in and after January, 1912, together with the balance of the account applied and retained at the time the petition was filed, the whole aggregating $2,282.77. The order goes on to provide as follows:

Lynch & Willis, of Utica, N.Y. (Charles I. Taylor, of New York City, of counsel), for appellants and cross-appellees.

Martin & Jones, of Utica, N.Y. (Richard R. Martin, of Utica, N.Y., of counsel), for Cantwell as trustee.

Before LACOMBE, COXE, and ROGERS, Circuit Judges.

ROGERS Circuit Judge (after stating the facts as above).

The question involved in this case is as to the effect of the bankruptcy of a depositor in a bank upon the bank's right to set off sums due from it to the bankrupt against sums due from the bankrupt to it.

The bankruptcy act in section 68 contains the following provisions on the subject of set-offs and counterclaims:

'a. In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.'

'b. A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate; or (2) was purchased by or transferred to him after the filing of the petition, or within four months before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent, or had committed an act of bankruptcy.'

In section 60 the act contains the provision relating to preferences. It provides in part as follows:

'a. A person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition, or after the filing of the petition and before the adjudication, * * * made a transfer of any of his property, and the effect of the * * * transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other such creditors of the same class.'

And in subdivision 'b' of the same section it is provided:

'If a bankrupt shall have * * * made a transfer of any of his property, * * * being within four months before the filing of the petition in bankruptcy, or after the filing thereof and before the adjudication, the bankrupt be insolvent and the * * * transfer then operate as a preference, and the person receiving it or to be benefited thereby, or his agent acting therein, shall then have reasonable cause to believe that the enforcement of such * * * transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value from such person.'

And in section 57, subdivision 'g,' as amended by Act Feb. 5, 1903, c. 487, Sec. 12, 32 Stat. 799 (U.S. Comp. St. Supp. 1911, p. 1504), it is provided as follows:

'The claims of creditors who have received preferences, voidable under section sixty, subdivision 'b,' or to whom * * * transfers * * * void or voidable under section sixty-seven, subdivision 'e,' have been made or given, shall not be allowed unless such creditors shall surrender such preferences. * * * '

In considering the facts in the present case it is necessary to keep in mind the foregoing provisions of the bankruptcy act. It is also necessary to remember that the petition in bankruptcy was filed on January 17, 1912, and that the adjudication followed on February 5, 1912.

The evidence shows that between October 7 and December 26, 1911, the bank charged off various sums for principal and interest, aggregating the sum of $1,231.29. During the whole of that period the relation of debtor and creditor existed between the bank and the company, and at the various times when the bank charged off the several set-offs, the company was indebted to the bank on promissory notes. The several transactions were done in the due, regular, and usual course of business, and at a time when the company's business was being conducted in the usual manner; there being no evidence to show that the company contemplated bankruptcy prior to January 1, 1912.

The claim of the trustee is that the items aggregating $1,231.29, which the bank charged off prior to January 1, 1912, were preferential payments or transfers to the Utica City National Bank, not because that sum of money had been deposited in the bank by the Wright-Dana Company, but because they were payments or transfers made within four months of the filing of the petition in bankruptcy, at times when the Wright-Dana Company was insolvent and when the Utica City National Bank had reasonable cause to believe that the enforcement of the transfer would effect a preference in its favor.

The right of a bank to a set-off as against a bankrupt depositor was passed upon by the Supreme Court of the United States in New York County National Bank v. Massey, 192 U.S 138, 24 Sup.Ct. 199, 48 L.Ed. 380, a case which...