Manly v. Ohio Shoe Co.

• Decision Date: 10 April 1928
• Docket Number: No. 2645.,2645.
• Parties: MANLY v. OHIO SHOE CO. In re BALTIMORE SHOE HOUSE, Inc.
• Court: U.S. Court of Appeals — Fourth Circuit

59 ALR 413, 25 F.2d 384 (1928)

MANLY v. OHIO SHOE CO.

In re BALTIMORE SHOE HOUSE, Inc.

No. 2645.

Circuit Court of Appeals, Fourth Circuit.

April 10, 1928.

G. Ridgely Sappington, of Baltimore, Md. (J. Purdon Wright and Charles G. Baldwin, both of Baltimore, Md., on the brief), for appellant.

Henry E. Beebe, of Cincinnati, Ohio, and John L. G. Lee, of Baltimore, Md., for appellee.

Before WADDILL, PARKER, and NORTHCOTT, Circuit Judges.

PARKER, Circuit Judge.

This is an appeal from an order directing that the trustee in bankruptcy of the Baltimore Shoe House, Inc., return to the petitioner, the Ohio Shoe Company, certain shoes in his possession as trustee. Return of the shoes was asked on the ground that bankrupt had obtained them by fraud and false representations as to its financial condition, that petitioner elected to rescind the sale on that account, and that the goods could be readily identified, being intact in the warehouse of the bankrupt.

The facts upon which the claim of petitioner is based may be briefly stated. The shoes which are the subject of controversy were ordered by the bankrupt on May 1, 1926. At that time bankrupt was hopelessly insolvent and had no reasonable expectation of being able to pay for them. This insolvent condition was concealed from petitioner, and the shoes were duly shipped in June to be paid for August 15th. Upon arrival in Baltimore, they were stored in the warehouse of the bankrupt, where they remained until the adjudication of bankruptcy in August.

It appears that petitioner had had no prior dealings with the bankrupt, and that the acceptance of the order and the extension of credit therein provided for was based upon a credit rating in the latest book of R. G. Dun & Co., to which petitioner was a subscriber. This book rated bankrupt as being worth from $125,000 to $200,000 and its credit as being first grade. The book was issued in March, 1926, and was based upon a financial statement furnished by bankrupt in January of that year. In this statement, which was prepared by auditors under the direction of its officers, bankrupt was shown as having assets above liabilities, exclusive of stock liability, exceeding $220,000 and a surplus exceeding $120,000. As a matter of fact, it was hopelessly insolvent at the time, and the legitimate inference, as found by the District Judge, is that it was thus insolvent to the knowledge of its officers. None of the officers was examined in explanation of the false statement furnished Dun & Co. or of the purchase in the face of evident inability to make payment. In rating bankrupt, Dun & Co. had before it other information such as reports with regard to the bankrupt's standing; but it is fair to say that the rating was based upon the false statement furnished by bankrupt, as no such rating would have been given if bankrupt had refused to furnish a statement or if in the statement furnished it had truthfully stated its condition and thus shown its insolvency.

The law applicable to the case seems well settled. Where goods are obtained by fraud of the bankrupt, the seller may rescind the contract of sale and reclaim them if he can identify them in the hands of the trustee. This is on the theory that fraud renders all contracts voidable, and that neither in law nor in morals would the trustee be justified in holding goods obtained by the fraud of the bankrupt for the benefit of other creditors. Such creditors have no right to profit by the fraud of the bankrupt to the wrong and injury of the party who has been deceived and defrauded. In re Hamilton Furniture & Carpet Co. (D. C.) 117 F. 774, 776; Standard Oil Co. v. Hawkins (C. C. A. 7th) 74 F. 395, 33 L. R. A. 739. This does not result in a preference in favor of the seller who thus retakes goods obtained from him by fraud, because in such case the seller retakes his own property which he must be able to identify. Cunningham v. Brown, 265 U. S. 1, 11, 44 S. Ct. 424, 68 L. Ed. 873. There is little in the suggested danger of improper preferences being obtained under the guise of thus rescinding contracts of sale and reclaiming goods sold on the ground of fraud; for in every case the fraud must be established to the satisfaction of the court by evidence clear, unequivocal, and convincing.

Fraud justifying rescission of the contract and reclamation of the goods by the seller is established, where it is shown that the bankrupt was insolvent at the time of the purchase and did not intend to pay for the goods, and concealed such insolvency and intent from the seller. Donaldson, Assignee, v. Farwell, 93 U. S. 631, 23 L. Ed. 993; In re Independent Coal Corporation (C. C. A. 2d) 18 F.(2d) 1; In re New York Commercial Co. (C. C. A. 2d) 228 F. 120; Jones v. H. M. Hobbie Grocery Co. (C. C. A. 5th) 246 F. 431; Collier on Bankruptcy (13th Ed.) vol. 2, p. 1717 et seq. Such fraud is established, also, where it is shown that the bankrupt obtained the goods by means of material false representations as to his financial condition, which were relied on by the seller in making the sale on credit. In re Weissman (C. C. A. 2d) 19 F.(2d) 769; William Openhym & Sons v. Blake (C. C. A. 8th) 157 F. 536. And rescission in the latter case is justified even though the bankrupt may have intended to pay and may himself have been misled as to his financial condition and not have known that the material false representations were untrue. Turner v. Ward, 154 U. S. 618, 14 S. Ct. 1179, 23 L. Ed. 391; In re New York Commercial Co., supra; 12 R. C. L. p. 345, § 100; Collier on Bankruptcy (13th Ed.) vol. 2, pp. 1717, 1718. In the case at bar we think that the evidence shows fraud of both kinds, and that the order directing the return of the goods was clearly justified.

In the first place, the evidence justifies the conclusion that, when bankrupt gave the order for the shoes, its officers knew that it was hopelessly insolvent and had no reasonable prospect of paying for them except by giving an unlawful preference to the seller. This is the equivalent of "intent not to pay." In re Henry Siegel Co. (D. C.) 223 F. 369; Gillespie v. J. C. Piles & Co. (C. C. A. 8th) 178 F. 886, 891, 44 L. R. A. (N. S.) 1; Jones v. H. M. Hobbie Grocery Co., supra (C. C. A. 5th) 246 F. 431; Morrow Shoe Mfg. Co. v. New England Shoe Co. (C. C. A. 7th) 57 F. 685, 693, 24 L. R. A. 417; Collier on Bankruptcy (13th Ed.) vol. 2, p. 1719; note 44, L. R. A. (N. S.) at page 11 et seq.; 12 R. C. L. p. 269, par. 36.

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