Kimmerle v. Farr

• Decision Date: 12 July 1911
• Docket Number: 2,106.
• Citation: 189 F. 295
• Parties: KIMMERLE v. FARR.
• Court: U.S. Court of Appeals — Sixth Circuit

189 F. 295

KIMMERLE v. FARR.

No. 2,106.

United States Court of Appeals, Sixth Circuit.

July 12, 1911

Clyde W. Ketcham and Chas. E. Sweet, for appellant.

Kleinhans & Knappen and C. W. Hendryx, for appellee.

Before SEVERENS and KNAPPEN, Circuit Judges, and SANFORD, District judge.

SANFORD District Judge.

This is a bill in equity filed in April, 1909, in the United States District Court by the appellant, Charles H. Kimmerle, as trustee in bankruptcy of the City Bank of Dowagiac, against Willis M. Farr, the appellee, to set aside the assignment of a real estate mortgage from said bank to Farr, made within four months prior to the filing of the petition in bankruptcy, on the ground that said assignment constituted the giving of a preference voidable by the trustee under section 60 of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3445)).

The District Court being of opinion that the trustee had not sustained the burden of proof in establishing either that the bank in assigning the mortgage to Farr intended to give him a preference, or that Farr had reasonable cause to believe that such intent existed, entered a decree dismissing the bill from which decree the trustee has appealed to this court.

The City Bank of Dowagiac, a partnership composed of Frank W Lyle, Ira B. Gage, and Leon R. Lyle, had been for many years engaged in carrying on the business of a private bank in the city of Dowagiac, Mich. The officers who had the principal charge and conduct of its affairs were Frank W. Lyle president, and Ira B. Gage, for many years cashier and later vice president. On October 4, 1907, the defendant Farr, who was treasurer of a local committee appointed for the purpose of building a soldiers' monument, apparently fearing litigation over the funds with other persons claiming to be the lawful members of the committee, withdrew from deposit in the City Bank all funds that had previously been deposited in the bank to the credit of the treasurer of the committee, aggregating $2,549.86, and received in lieu thereof a draft in his favor for a like amount drawn by the City Bank, by Gage as vice president, on the National City Bank of New York, the City Bank agreeing at the time to pay Farr interest on this draft until collected, as on a certificate of deposit.

Farr retained this New York draft in his possession without presenting it for payment until February 7, 1908, when he took it to the City Bank, and surrendered it to the bank, and received from the bank in exchange a certificate of deposit for the amount of the draft and interest, $2,567.20. He also received from the bank as collateral security for the payment of this certificate of deposit the assignment of a mortgage for $3,000 held by the bank on certain real estate in Dowagiac. On the day following this assignment of the mortgage the bank closed its doors and suspended business. One week later the bank and its individual members filed their petition to be adjudicated voluntary bankrupts. Such adjudication was made, and the complainant was subsequently appointed trustee in bankruptcy in such proceedings.

The trustee is now seeking to set aside as a preferential transfer the assignment to Farr of the mortgage as collateral security to the certificate of deposit.

Under sections 60a and 60b of the bankruptcy act, as it stood after the amendment of February 5, 1903 (Act Feb. 5, 1903, c. 487, Sec. 13, 32 Stat. 799 (U.S. Comp. St. 1909, p. 1314)), and prior to the amendment of June 25, 1910 (Act June 25, 1910, c. 412, 36 Stat. 838), the burden of proof is on a trustee in bankruptcy, seeking to avoid as a preference a transfer of property made by a bankrupt, to prove by sufficient evidence: That the bankrupt (1) while insolvent (2) within four months of the bankruptcy (3) made the transfer in question; (4) that the creditor receiving the transfer will be thereby enabled to obtain a greater percentage of his debt than other creditors of the same class; and (5) that the creditor receiving the transfer had reasonable cause to believe that it was thereby intended to give a preference.

Act July 1, 1898, c. 541 (30 Stat. 354): Act Feb. 5, 1903, c. 487 (32 Stat. 797); Tumlin v. Bryan (Fifth Circuit) 165 F. 166, 167, 91 C.C.A. 200, 21 L.R.A. (N.S.) 960; In re Neill-Pinckney-Maxwell Co. (D.C.) 170 F. 481, 483.

It is undisputed that the mortgage was assigned to Farr within four months of the bankruptcy, and that, if not avoided, its effect will be to give Farr a larger percentage of his debt than other like creditors. And while the evidence as to the insolvency of the bank at the time the mortgage was assigned is meager, falling short of the requirements stated in Tumlin v. Bryan, supra, and would, in large part, have been subject to exclusion if the action of the court below had been invoked thereon by proper objection, yet the fact that the bank was then insolvent is not now disputed, and in the present state of the record must be regarded as established by the weight of the proof.

Evidence, though incompetent as hearsay or otherwise, if not seasonably objected to on proper grounds or excepted to, constitutes evidence in the cause. Schlemmer v. Railway Co., 205 U.S. 1, 19, 27 Sup.Ct. 407, 51 L.Ed. 681; Damson v. Carrol, 163 Mass. 404, 408, 40 N.E. 185. And see Teal v. Bilby, 123 U.S. 572, 576, 579, 8 Sup.Ct. 239, 31 L.Ed. 263; Supreme Council of Catholic Knights v. Fidelity & Casualty Co. (Sixth Circuit) 63 F. 48, 57, 11 C.C.A. 96.

The controlling question in the case then is whether the complainant has established by the weight of the proof the fact that Farr had reasonable cause to believe that by the assignment of the mortgage it was intended to give him a preference.

We first proceed to a consideration of the principles of law in the light of which this question of fact is to be determined.

1. Upon the question whether the requirement of section 60b that the creditor 'should have had reasonable cause to believe that it was intended thereby to give a preference' involves the necessity of showing that the debtor in fact intended to give a preference, there has been a diversity of opinion.

In Western Tie Co. v. Brown, 129 F. 728, 64 C.C.A. 256, in which it was held by the Circuit Court of Appeals for the Eighth Circuit that a transaction by which a creditor, without the consent of the debtor, appropriated to the payment of his claim property of the debtor which happened to be under his control, constituted a voidable preference, the court said that:

'an intention on the part of the insolvent to give a preference by means of a transfer which he makes is not always indispensable to its existence.'

This decision was, however, reversed by the Supreme Court on the ground that to constitute a preference the transfer or payment must have been the act of the debtor. Western Tie Co. v. Brown, 196 U.S. 502, 509, 25 Sup.Ct. 339, 49 L.Ed. 571, cited on this point in Rector v. Bank, 200 U.S. 405, 419, 26 Sup.Ct. 289, 50 L.Ed. 527.

In Parker v. Black (D.C.) 143 F. 560, it was held that, if the creditor knew or had reason to believe that the debtor was insolvent at the time a payment was made on a pre-existing debt, such payment constituted a voidable preference 'irrespective of whether the bankrupt intended to give a preference or not. ' To the same effect is Benedict v. Deshel, 177 N.Y. 1, 68 N.E. 999.

On the other hand, in Hardy v. Gray, 144 F. 922, 75 C.C.A. 562, it was held by the Circuit Court of Appeals for the First Circuit, after a full consideration of the language of the act and a review of former decisions, that to render a preference voidable under section 60b of the bankruptcy act, and therefore one which must be surrendered by the creditor receiving it before proving his claim under section 57g, there must have been an actual intention on the part of the debtor to give a preference or that which the law regards as its equivalent, since without the existence of such intention in fact on the part of the debtor the creditor cannot be said to have had reasonable cause to believe that a preference was intended. The court said:

'Naturally and justly it would be said that no one could be charged with a reasonable cause to believe something unless the something existed to which the belief was supposed to relate. It is true that the ordinary rule that a person who does an act is supposed to contemplate what results therefrom, applies to cases of this class, but only as an element; and it cannot apply even as an element unless the party who does the act has a knowledge of the essential facts which tend to produce the resulting consequences, or at least has a reasonable cause to believe them, or purposely shuts his eyes.'

In In re First National Bank of Louisville, 155 F. 100, 103, 84 C.C.A. 16, 19, this court, speaking through Judge Severens, said:

'But, to make the reception of payment a preference, the creditor must have had reasonable cause to believe that the debtor was intending to give him a preference over other creditors, and we incline to think, with the Circuit Court of Appeals for the First Circuit (Hardy v. Gray, 144 F. 922, 925, 75 C.C.A. 562), that the reasonable implication of the language is that the debtor himself must have intended the preference. The very word signifies the doing of a thing with a purpose to give an advantage; and the construction which treats the motive of the debtor as indifferent seems artificial and awkward.'

In Rutland County Nat. Bank v. Graves (D.C.) 156 F. 168, the court said:

'That, in order to make a payment a preference, it must have been made by the debtor with intent to prefer, and the creditor who received it must have had reasonable cause to believe that a preference

...