Lang v. First Nat. Bank in Houston

• Decision Date: 25 August 1954
• Docket Number: No. 14665.,14665.
• Citation: 215 F.2d 118
• Parties: LANG v. FIRST NAT. BANK IN HOUSTON.
• Court: U.S. Court of Appeals — Fifth Circuit

215 F.2d 118 (1954)

LANG v. FIRST NAT. BANK IN HOUSTON.

No. 14665.

United States Court of Appeals Fifth Circuit.

August 25, 1954.

Emanuel Harris, New York City, Thomas B. Weatherly, Houston Tex., Vinson, Elkins, Weems & Searls, Houston, Tex., for appellant.

M. U. S. Kjorlaug and Bruce Billingsley, Boyles & Billingsley, Houston, Tex., for appellee.

Before STRUM and RIVES, Circuit Judges, and DAWKINS, District Judge.

DAWKINS, District Judge.

The trustee in bankruptcy of Thomas Bryan & Associates, Inc., appeals from a judgment rejecting his demand for the recovery of funds paid by the bankrupt to the appellee, alleged to have been an illegal preference under Section 60, sub. b of the Bankruptcy Act.¹ The sole question is whether or not appellee had reasonable cause to believe that the debtor was insolvent at the time of the payment.

The bankrupt was a New York corporation doing a large and extensive contracting business and its operations included jobs in several states. During 1950 it had regularly borrowed large sums of money from the appellee bank on short term notes, and with insignificant exceptions, had paid the loans in full at or near the maturity dates. These loans were secured by non-notification assignments of invoices for payment on the jobs the bankrupt was constructing; and it was the practice of the bankrupt to deposit the checks paying these invoices in its account at the appellee bank and to draw checks against its account in payment of the loans.

On December 22, 1950, appellee loaned the bankrupt $125,000, due in 30 days and secured by a non-notification assignment of an invoice to the Atomic Energy Commission, with which the bankrupt had a construction contract in Los Alamos. On December 27, 1950, the appellee made an additional loan of $25,000; another of $100,000 on January 2, 1951; and still another of $35,000 on January 15, 1951.

On January 21, when the December 22 loan became due and was not paid, an officer of the bank called upon the bankrupt and obtained a notification assignment of the invoice, notifying both the Atomic Energy Commission and the surety on the bankrupt's construction bonds. Two days later, appellee loaned the bankrupt an additional $100,000.

Between the date of the last loan and February 8, 1951, the bank's officer had a number of conversations with officers of the bankrupt, who informed him that they were worried about the condition of their company. However, they explained that the difficulty was caused by excessive retainages and penalties on some of their jobs and that as soon as they received the money being withheld the pressure would be relieved. It was explained that over $500,000 was being so retained on the Los Alamos job alone.

On February 8, 1951, the bankrupt received a check from the Atomic Energy Commission in the amount of $41,143.88; which was deposited with the bank and for which sum the debtor drew its own check in payment on its notes.

On February 11, 1951, the surety on the construction company's bond took over the several jobs under its contract; and on February 24 following an involuntary petition in bankruptcy was filed against the corporation in the Southern District of New York.

The trustee brought this suit to recover the $41,143.88 paid February 8, alleging insolvency at that time and that the bank knew or had reasonable cause to believe the construction company was in that condition. Although the bankrupt was found to be insolvent on February 8, the court held appellee had no reasonable cause to believe it was and dismissed the trustee's suit.

It is conceded that since all of the evidence was documentary or in the form of written deposition, the findings of the trial court need not be given the weight usually accorded them under Rule 52 of Civil Procedure, 28 U.S.C.A.² Hence, the trustee (appellant) points up the following evidentiary facts: that on January 21, when the December 22 loan was not paid, the bank officer called on the bankrupt rather than requesting its agent to call at the bank; that new security was taken for the loan; that according to the bank officer's testimony there was "real difficulty other than just the complaints of people on the job, supplies or subcontractors for unpaid amounts"; that the bank officer was "trying in every way possible to ascertain the true state of affairs"; that the bank officer was "manning the pumps, to try to keep that outfit going until they could complete those critical jobs"; and that Mr. Bryan had told the bank officer he would try to pay the debts out of his private funds if other means failed.

Relying on cases cited³ to the effect that a creditor put on inquiry by the circumstances of his debtor is chargeable with knowledge of those facts which investigation would reveal, the trustee contends that the circumstances recited above require a finding that the bank had reasonable cause to believe the bankrupt insolvent when it accepted the February 8 payment. This conclusion is strengthened, he says, by the trial court's finding that by February 14, 1951, the fact of the bankrupt's insolvency was well known to all. In support of his argument, he cites Corn Exchange Nat. Bank & Trust Co. v. Klauder, 318 U.S. 434, 63 S.Ct. 679, 87 L.Ed. 884; Coombs v. Merchants Bank, 2 Cir., 161 F.2d 858; Security-First National Bank v. Quittner, 9 Cir., 176 F.2d 997.

We recognize the rule of the authorities cited in footnote 3, but the question is whether or not the circumstances known to the bank were sufficient to cause a full inquiry into the solvency (in the legal sense) of the bankrupt, and if so, was sufficient inquiry made.

The past relationships between the appellee and the bankrupt had been successful, and we think that it was not unreasonable for the bank officers to take into consideration the nature of the business in which the bankrupt was engaged. It is well known in the business world that at a given time a large contractor may be insolvent in the sense that he owes more money than he has liquid assets; yet this is not necessarily insolvency in the legal sense. Rather it is only a shortage of cash or working...