Irish v. Citizens' Trust Co. of Utica, N.Y.

• Citation: 163 F. 880
• Parties: IRISH v. CITIZENS' TRUST CO. OF UTICA, N.Y.
• Decision Date: 13 August 1908
• Court: U.S. District Court — Northern District of New York

163 F. 880

IRISH v. CITIZENS' TRUST CO. OF UTICA, N.Y.

United States District Court, N.D. New York.

August 13, 1908

Grant &amp Wager and Jones, Townsend & Rudd, for plaintiff.

Dunmore & Ferris and F. G. Fincke, for defendant.

RAY District Judge.

The Coventry-Evans Company, a corporation existing under the laws of the state of New York, was engaged in mercantile pursuits and on the 27th day of January, 1905, an involuntary petition in bankruptcy was filed against it by three of its creditors Charles W. Darling, Foster Bros. Manufacturing Company, and the Utica Sunday Tribune Company, and on the 10th day of February, 1905, the said company was duly adjudicated a bankrupt.

The bankrupt company, a stock corporation, was organized about April 1, 1902, and of its authorized capital stock, $20,000 $12,000 was issued at about that date. Among the members of the board of directors and stockholders of the company were John A. Breen, Charles J. Breen, Jeremiah C. Breen, Thomas Breen, Charles W. Darling, and Hammond P. Evans. Darling had little interest in the concern except as a creditor to the extent of some $7,000 or $8,000 and which indebtedness to him in the fall of 1904 was put in the form of a note due three months from date for $7,151.13. This note came due prior to December 10, 1904, and as early as January 14, 1905, Darling was insisting upon its payment. This company was also owing the defendant, Citizens' Trust Company of Utica, N.Y., something more than $11,000 in the form of notes discounted at the bank and which will be referred to hereafter. The company was owing large sums outside of the indebtedness referred to to various persons and firms of whom it purchased merchandise, etc., and much of this indebtedness was past due prior to the filing of the petition in bankruptcy, and payment had been urged. The company had not been able to pay, and had not paid, all of its accounts owing when due or when demand was made; but it had obtained extensions in many, and perhaps most, instances by paying something on account. The evidence shows and is quite conclusive that this company lost money largely from the time it commenced doing business. The books and inventory of the company, January 1, 1903, showed a net loss of a little over $3,000, and January 1, 1904, they showed an additional loss of something over $9,000 in running the business which, of course, wiped out the capital stock paid in of $12,000.

November 30, 1904, there was a fire in the store of the company which caused, substantially, a total loss. The company had an insurance upon its stock of $15,000. That the company met with a total loss, substantially, by this fire, must have been known to the defendant, the Citizens' Trust Company of Utica. The trust company also knew that the furniture company owed other debts, but did not know the amount or extent of its indebtedness; that is, there is no evidence showing that the trust company knew this. By some jugglery with figures and facts, the modus operandi not appearing, the adjusters made some sort of a statement in adjusting the fire loss that the company had made a gross profit in 1904, up to the time of the fire, of about $13,000 for that year alone, and the board of directors, on this statement and on one from John A. Breen, passed a resolution, December 10, 1904, that the company continue business, and it thereupon directed a man to go out and purchase more goods.

That the furniture company was then hopelessly insolvent is abundantly shown by the evidence. That this fact was known to the company and to the directors is conclusively proved. Its insurance money was but little more than sufficient to pay the indebtedness to the trust company, and its property and assets of all kinds, exclusive of this, would have paid but a small fraction of its other indebtedness. The officers and directors of the furniture company must have known, and I find that they did know, that they had been doing business at a large and increasing loss, and that the furniture company was insolvent. One of the Breens on the stand testified that in estimating the value of their stock of goods they took the cost price of them, and then added to that 50 or 60 per cent. There was no pretense that the goods had increased in value. This appears to me to be counting chickens before they are hatched. Quite likely, the most of these goods might have been disposed of at a profit of 50 or 60 per cent., but experience had shown that it cost much more than the profit to get it. Crediting these men with common sense and ordinary understanding, I am compelled to find, and do find, as above stated, that, at the time they made the payments to the defendant, the Citizens' Trust Company, they knew the company was insolvent. It does not follow, however, that the furniture company intended a preference, for hope burns brightly in the human heart, and I am convinced that the company intended to continue business and hoped to make money and pay off its indebtedness. In the beginning of December, 1903, the furniture company did not anticipate that Darling would demand payment of his note of over $7,000, and it may be, and probably is, true that prior to the 15th of December, or about that time, the furniture company expected it would carry the loans with the trust company as it formerly had done and without other security or indorser.

The Citizens' Trust Company was not secured, and it is evident from the evidence in the case that, on or prior to December 15, 1904, the Citizens' Trust Company had demanded payment of a part at least of the indebtedness owing to it from the furniture company, for on that day the trust company, having on deposit with it more than that sum to the credit of the furniture company derived from its insurance, charged up to the account of the furniture company $6,070 of the notes of the furniture company, and the one who did this in the trust company testified that he had been promised a check. The check not being forthcoming prior to the close of the bank on that day, notes to this amount were charged to the account. The evidence is that, after this was done, and that evening, or the next day, the check promised came in. Under the bankruptcy law, this would not constitute a preference which can be recovered by the trustee in bankruptcy, unless I also find that the Citizens' Trust Company at the time had reasonable cause to believe that in making such payment it was intended by the furniture company to give a preference. It does not expressly appear that the trust company refused to loan money to the furniture company for the further carrying on of its business. I think the evidence fails to show that the trust company had reasonable cause to believe that the furniture company was insolvent, or that the payment to it of these notes referred to would enable it to obtain a greater percentage of its debt than any other of the creditors of the furniture company of the same class.

It is contended, however, that under section 48 of the stock corporation law of the state of New York (Laws 1892, p. 1838, c. 688), in connection with section 67e of the bankrupt act (July 1, 1898, c. 541, 30 Stat. 564 (U.S. Comp. St. 1901, p. 3449)), the plaintiff may recover this payment of December 15th.

Section 48 of the New York stock corporation law provides, in substance, that no transfer of any property of a corporation, which shall have refused to pay any of its notes or other obligations when due, by it or any officer, director, or stockholder thereof, nor any payment made when the corporation is insolvent, or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporation, shall be valid, and that every transfer or assignment or other act done in violation of such provisions shall be void. It follows that, irrespective of any intent or knowledge of the insolvency on the part of the trust company, if the payment of December 15, 1904, was made by the furniture company 'with the intent of giving a preference' to the Citizens' Trust Company over the other creditors of the furniture company, such payment was invalid and void, and under the provisions of section 67e of the bankruptcy act the trustee may recover such payment. When that payment was made, assuming it to have been a voluntary payment of the notes, was it made with intent to prefer the Citizens' Trust Company? If at that time the furniture company intended and expected to continue its business, to pay all its creditors, and expected that when needed it could have the same line of credit with the trust company it had had before, and only paid up these notes to save interest, an intent to prefer, in the sense of the law, cannot justly be imputed.

During the month of December, 1904, the furniture company received about $14,850 insurance money on its fire loss, which it deposited with the trust company. There is no special significance in this, as the furniture company did its banking business with the trust company, and had since its organization, and the Breens had done their business with its predecessor. Was this money deposited there as a step in giving a preference, or to enable the trust company to obtain a banker's lien, or in the ordinary course of its business? The note to Darling was drawing interest, but, so far as appears, as stated, the other indebtedness (outside of that of the trust company), was not. It may fairly be inferred that the furniture company anticipated that from its sales it would derive profits and, by borrowing money from time to time, as absolutely needed, be able to make payments on its debts to various firms and individuals and postpone final and full payment, and so eventually get out of debt....