Lowden v. Northwestern Nat. Bank & Trust Co.

• Citation: 84 F.2d 847
• Decision Date: 27 July 1936
• Docket Number: No. 10390.,10390.
• Parties: LOWDEN et al. v. NORTHWESTERN NAT. BANK & TRUST CO. OF MINNEAPOLIS, MINN.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

84 F.2d 847 (1936)

LOWDEN et al. v. NORTHWESTERN NAT. BANK & TRUST CO. OF MINNEAPOLIS, MINN.

No. 10390.

Circuit Court of Appeals, Eighth Circuit.

July 27, 1936.

Marcus L. Bell, of Chicago, Ill., and Edward S. Stringer, of St. Paul, Minn. (Alexander E. Horn, of St. Paul, Minn., Daniel Taylor, of Chicago, Ill., Philip Stringer, of St. Paul, Minn., and W. F. Dickinson and Otis F. Glenn, both of Chicago, Ill., on the brief), for appellants.

Claude G. Krause, of Minneapolis, Minn. (Glenn S. Stiles, of Minneapolis, Minn., on the brief), for appellee.

Before SANBORN, WOODROUGH, and THOMAS, Circuit Judges.

SANBORN, Circuit Judge.

The Northwestern National Bank & Trust Company of Minneapolis, a national bank, prior to the year 1931, purchased upon the open market $100,000 face value of the first and refunding gold bonds of the Chicago, Rock Island & Pacific Railway Company. These bonds were purchased from the Guaranty Company and the National City Company, both of New York, and the dates of purchase and prices paid were as follows: November 18, 1927, $25,000, at 96; July 19, 1928, $50,000, at 94¾; October 8, 1930, $25,000, at 99 3/8.

These bonds, owned by the bank, were bearer bonds and a part of an authorized issue of $163,000,000, of which, at all times here material, $104,000,000 had been issued and were in the hands of the public. The bonds were dated April 1, 1904, were due April 1, 1934, and bore interest at 4 per cent. per annum payable April 1st and October 1st. The bank continued to hold the bonds, and by June, 1933, they were selling at less than 30 per cent. of their par value, so that they were worth upon the market less than one-third of what the bank had originally paid for them.

The general offices of the Rock Island were in Chicago. It had had nothing to do with the purchase of these bonds by the bank, and never knew of such purchase prior to June, 1933. The Rock Island did business in Minneapolis, and had a checking account in the appellee bank which it had maintained for many years. The fact that the railroad had this checking account had no relation to the purchase of its bonds by the bank.

On June 7, 1933, the Rock Island filed a petition for reorganization under section 77 of the Bankruptcy Act (11 U.S.C. § 205)¹ in the United States District Court for the Northern District of Illinois. This petition disclosed obligations of approximately $2,000,000, maturing within 5 months, and $144,000,000 maturing within 10 months, and stated: "That the debtor is without funds to pay and discharge the aforesaid obligations as they mature, and on information and belief alleges that it has no means of borrowing or otherwise procuring such funds; that it is unable to meet its debts as they mature. * * *"

This petition was approved by the court the same day that it was filed. The order of approval did not appoint trustees of the estate of the debtor, but provided: "That the debtor be, and hereby it is, authorized and directed, pending further order of this Court in the premises, to run, manage, maintain, operate and keep in proper condition and repair the railroads and property of the debtor, wherever situated, whether in this state, judicial circuit, or elsewhere, and to manage and conduct its business. * * *"

On the day the petition was filed, an officer of the Rock Island sent from New York to the bank by mail a letter notifying it of the filing of the petition. This letter was received by the bank on June 9th. On June 10th there was mailed to the bank from the officers of the Rock Island in Chicago a letter inclosing a copy of the order approving the petition for reorganization, which letter was received on June 12th.

On June 7th, at the exact moment of the filing of the petition in Chicago, the Rock Island had to its credit in its checking account with the bank in Minneapolis, $36,908.72. Other deposits were made on that day, so that at the close of business the balance to the credit of the Rock Island in the bank was $45,362.94. In the course of its business, the Rock Island continued to make deposits each day thereafter, and at no time between June 7, 1933, and June 19, 1933, was the balance in its account at the bank drawn down below $36,908.72. The smallest amount standing to its credit at any time after June 7th was $39,751.62, the balance at the close of business on June 10th. On June 9th, the Rock Island had drawn a check for $50,000 against its account at the bank, and on June 10th the bank had paid it.

On June 16, 1933, the bank wrote the Rock Island in part as follows:

"Early this week, we received in the mail a letter from your company notifying us that your company had filed a petition with the United States District Court under the bankruptcy act for the purpose of effecting a reorganization of your company. The Court's order in that matter was filed on June 7th, 1933. At that time, there was on deposit by your company with us the sum of $45,362.94; at that time we also held $100,000.00 par value of your First and Refunding Bonds and $50,000 of Equipment Trust Certificates issued by your company.

"We are advised by our counsel that the filing of the petition in bankruptcy by you was sufficient to constitute an act of insolvency which gave us the right to offset the bank balance against the amount due on your obligations to us. After giving much consideration to this question, we have determined to exercise that right. We are, therefore, advising you of that fact at this time and request you not to draw checks on us which will reduce your balance with us on account of the $45,362.94 which was or deposit by you with us on June 7th."

On June 19, 1933, to effectuate this intention to set off the $45,362.94 against the bonds of the Rock Island, the bank debited the Rock Island account to that extent, and credited the amount against the Rock Island bonds owned by it. On June 23, 1933, the bank restored to the checking account of the Rock Island $5,611.32 of this debit, making the net deduction for the purpose of set-off, $39,751.62. This was the amount standing to the credit of the Rock Island at the close of business on June 10, 1933, and, as before stated, the smallest credit balance in its checking account at any time between June 7 and June 19, 1933.

The bank tendered to the Rock Island bonds equal in face value to the $39,751.62. This tender was refused, and the act of the bank in making the set-off was protested by the railroad.

On June 19, 1933, the Rock Island bonds held by the bank had not matured and were not in default as to either principal or interest.

On November 22, 1933, the court in which the petition for reorganization had been filed appointed trustees for the estate of the Rock Island. Thereafter, they commenced an action at law in the United States District Court for the District of Minnesota to recover from the bank the amount which it had set off against the bonds. By the time this action was commenced, the bonds of the Rock Island here involved had matured and were in default. The bank answered; alleged that on June 7, 1933, when the petition was filed, the Rock Island was insolvent; and asserted the legality of the set-off of June 19, 1933. In their reply the trustees denied that the railroad was then or thereafter insolvent, and denied the legality of the set-off made by the bank. The case, on motion of the bank, was transferred to equity and tried as a suit in equity. The facts were virtually all stipulated. There was, however, evidence introduced which tended to show that prior to June 7, 1933, the Rock Island had no knowledge of the ownership of the bonds by the bank; and there was also evidence introduced to the effect that prior to about June 12th, no notice of the Rock Island's petition for reorganization came to the attention of any executive officer of the bank.

The court below, after careful consideration, reached the conclusion that the bank could properly set off against its Rock Island bonds $36,908.72, the credit balance of the Rock Island in the bank at the time the petition for reorganization was filed. (D. C.) 11 F.Supp. 929. Findings of fact, conclusions of law, and a decree were accordingly entered, from which this appeal is taken by the trustees.

Before considering the questions of law involved, it may be well to appraise the practical aspects of the situation presented. The trustees and the bank each claim superior equities. On June 6, 1933, the bank owned $100,000 of the bonds of the Rock Island, which it had purchased for an investment and which then had a market value of less than $30,000, and were not due until April 1, 1934. There had been up to that time no reason to believe that anything had occurred or would occur to accelerate the maturity of the bonds. It is not unreasonable to suppose that, upon the books of the bank, these bonds were carried at their market value. While they constituted the promise of the Rock Island to pay the par value on April 1, 1934, they did not represent loans made by the bank to the railroad. They were secured by a trust deed. By appropriating approximately $37,000 of what it owed the Rock Island because of the deposits in the bank, the bank paid to itself $37,000 of these bonds which it owned; and still had left $63,000 face value of such bonds. In other words, by taking advantage of the situation arising from the filing of the petition for reorganization by the Rock Island as a basis for set-off, the bank disposed of 37 of its bonds, worth perhaps $10,000, for $37,000, and had left 63 bonds worth, upon the same basis, about $17,000.

From the standpoint of the Rock Island, the practical situation appears to have been about this: Its checking account in the bank represented current receipts derived from operations and intended to be used in the conduct of its business as a common carrier. The account had no relation to the funded indebtedness of the railroad in the sense that it represented...