Johnson v. Cratiot Cnty. State Bank

• Decision Date: 21 December 1916
• Docket Number: No. 362.,362.
• Citation: 193 Mich. 452,160 N.W. 544
• Parties: JOHNSON v. CRATIOT COUNTY STATE BANK.
• Court: Michigan Supreme Court

193 Mich. 452

160 N.W. 544

JOHNSON

v.CRATIOT COUNTY STATE BANK.

No. 362.

Supreme Court of Michigan.

Dec. 21, 1916.

Error to Circuit Court, Gratiot County; Kelly S. Searl, Judge.

Action by D. Lloyd Johnson, trustee of the St. Louis Chemical Company, bankrupt, against the Gratiot County State Bank. There was a judgment for plaintiff, and defendant brings error. Affirmed.

Argued before STONE, C. J., and KUHN, OSTRANDER, BIRD, MOORE, STEERE, BROOKE, and PERSON, JJ. Geo. P. Stone, of Ithaca, and L. B. McArthur, of Lansing, for appellant.

Lyon & Moinet, of St. Johns (William A. Bahlke, of Alma, of counsel), for appellee.

BIRD, J.

A petition was filed in the federal court on the 25th day of June, 1909, against the St. Louis Chemical Company, by certain of its creditors, praying to have it adjudged a bankrupt. Subsequently the company was adjudged a bankrupt and a trustee appointed. The company became indebted to defendant bank on a promissory note for $5,000, in July, 1907, and the same was renewed from time to time until February 5, 1909, when the company commenced to make payments thereon. From that date up to March 31, 1909, it made several payments aggregating $4,300. It is to recover this sum that the trustee filed this suit, it being his claim that the payments were made within four months of the bankruptcy proceedings and while the company was insolvent.

1. The principal error relied upon by the bank was the court's refusal to instruct the jury that under the proofs defendant had a right to set off the amount due on its note against the chemical company's deposit.

It was the claim of defendant that deposits were made by the company in its bank from time to time, in the usual course of business, and that by reason thereof the relation of debtor and creditor existed, and that after the note became due it had a lawful right under the law to set it off against the deposit, and it is contended that the bankruptcy laws, in express terms, authorize this to be done. The particular section referred to is section 68a of the Bankruptcy Law, and it provides in part that:

‘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.’

Plaintiff, in answer to this contention, concedes that, if the relation existing between defendant and the company had been the ordinary relation existing between banker and depositor, its conclusion would be sound. But it is the contention of plaintiff that the deposits made in defendant bank and the checks drawn thereon in payment of defendant's note were done in pursuance of a fraudulent scheme on the part of the directors of the company, after they knew the company was insolvent, to convert its quick assets into money and pay off, before the crash came, certain notes, including the one in question, which had been indorsed by two of the directors of the company; that the carrying out of this scheme within four months from the date of the bankruptcy proceedings, and while the company was insolvent, created an unlawful preference in behalf of the bank and was in fraud of its other creditors. It was further claimed that the defendant had notice that the company was insolvent and had knowledge of the unlawful scheme when the payments were made.

If it can be said that these claims were supported by competent proof, the trial court was justified in disposing of the matter as he did. The jury were instructed in part that:

‘Now, when the money was placed in the bank, the bank would owe the money to the chemical company. The chemical company owed a note to the bank. If the bank received this money in good faith and without knowledge, such knowledge as I have defined to you in my charge here, of the fraudulent intent upon the part of the chemical company, then it would have the right to offset its note against the money so deposited, and, if the payments were received by the checks for the purpose of making payments upon the note, the bank, under those circumstances, could keep the money. But if it had notice or knowledge, or if in the exercise of bad faith it abstained from learning those things, when it might, by the exercise of reasonable diligence, and would have learned the fact that the money was placed there in pursuance of that plan of the chemical company to pay off certain of its directors and those who were indorsers upon its paper, then the bank could not keep the money and could not offset it against this note, and would have to pay it back to the trustee and receive its distributive share along with the other directors when it proved up its claims.’

The testimony tended to show that the directors were indorsers on notes to several banks, and, when it became obvious that the company could not weather the storm, they arranged to realize on the quick assets of the company and pay off these notes, and that during the time they were making these payments the company was insolvent. Testimony was admitted tending to show that notice of these facts was brought home to the defendant. If the jury believed this testimony, the defendant was not entitled to retain the payments because they were received in violation of the provision of the bankruptcy law against preferences. Section 60b of the Bankruptcy Law.

2. But it is strenuously insisted that there was no competent evidence to establish the fact that the company was insolvent for four months prior to the date of the filing of the petition, and that the directors had knowledge of it. To establish these facts the bankruptcy proceedings were received in evidence. The petition charged that the company was insolvent and had been for four months prior thereto, and that it had created preferences in behalf of certain of its creditors, by making payments on the notes heretofore referred to, including the one in question. The sworn answer denied these allegations. A hearing was had. The referee found the allegations to be established, and the district...