Mayo v. Pioneer Bank & Trust Company, 17540.

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Writing for the CourtJONES, BROWN and WISDOM, Circuit
Citation270 F.2d 823
PartiesRobert K. MAYO, H. E. Harper and Jack C. Murrell, as Trustees in Bankruptcy of Twin City Construction Company, Inc., Bankruptcy, Appellants, v. PIONEER BANK & TRUST COMPANY, Appellee.
Docket NumberNo. 17540.,17540.
Decision Date30 September 1959

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Cleve Burton, Richard H. Switzer, W. V. Lunn, John A. Carstarphen, Jr., Shreveport, La. (Lunn, Irion, Switzer, Trichel & Johnson, Shreveport, La., of counsel), for appellants.

Paul M. Hebert, Baton Rouge, La., Turner B. Morgan, Shreveport, La. (Morgan, Baker, Skeels, Middleton & Coleman, Shreveport, La., Breazeale, Sachse, Wilson & Hebert, Baton Rouge, La., of counsel), for appellee.

Before JONES, BROWN and WISDOM, Circuit Judges.

WISDOM, Circuit Judge.

The Trustees in Bankruptcy of Twin City Construction Company, a Louisiana corporation, sued The Pioneer Bank and Trust Company of Shreveport, Louisiana, to recover $69,145. The Trustees contend that, under Sections 60, sub. b and 67, sub. d of the Bankruptcy Act, 11 U.S.C.A. §§ 96, sub. b, 107, sub. d, the bankrupt corporation made certain voidable transfers to the bank. Three separate claims are involved: (1) one for $50,125; (2) one for $9,000; and (3) one for $10,200. The case was tried to the court without a jury. The district judge rejected all three claims of the Trustees. We affirm as to the first two claims, reverse and remand as to the third claim.

I. Background

For many years William A. Gray of Shreveport engaged in the construction business under the name of W. A. Gray Construction Company. To all appearances he was a successful contractor. For several years, however, before he died in 1956, he was in bad financial straits. With considerable skill he managed to conceal his financial plight until January, 1956.

Pertinent to this action is the fact that Gray was the president and sole stockholder of Twin City Construction Company, a corporation Gray organized in 1951. Twin City conducted no business prior to the transactions in question in this case.

Gray had an established line of credit at the Pioneer Bank. When the bank was organized in 1945, Gray was one of its first depositors and customers. Over a long course of dealings, the bank made many loans to Gray to finance his construction business and to permit him to start and carry forward individual construction contracts. Pioneer Bank had never sustained a loss on any loans to Gray. Rupert Campbell, President of the Pioneer Bank, handled Gray's account himself. The district judge found: "It is apparent that those who did business with Gray had utmost confidence in his ability to meet his financial obligations." 168 F.Supp. 505.

March 12, 1956 an involuntary petition in bankruptcy was filed against Gray. Two weeks later, on his voluntary petition, he was adjudicated a bankrupt. April 13, 1956 an involuntary petition in bankruptcy was filed against Twin City Construction Company by the Home Indemnity Company. April 21, 1956, Twin City voluntarily was adjudicated a bankrupt.

At the time of the trial, Twin City owed $71,045.32 in unsecured claims and $4,531.38 in taxes; the company had assets of $91.14. Gray owed $794,277.99 in unsecured claims and $5,435.82 in taxes; he had assets of $8,771.23.

II. The Claim for $50,125

On May 28, 1955, Gray talked with Campbell about obtaining a loan of $50,000. He told Campbell that he wanted to give up doing business individually and do business in corporate form by activating Twin City Construction Company and channeling his construction contracts into that corporation. He stated that his health had been poor and that by using Twin City he could insure continuity and avoid personal liability. Gray said that he had arranged to obtain needed capital from a cousin who was going into business with him.

The Pioneer Bank made the loan of $50,000, taking Gray's personal note, payable in fifteen days. At Gray's direction, the money was deposited in Twin City's checking account. Shortly thereafter, Gray issued to himself stock of Twin City amounting to $49,500. At the time of the loan the bank held collateral mortgages amounting to $40,000 on Gray's office building and equipment, a $40,000 mortgage on his home, and a pledge of all the stock of the Blair Apartments which Gray owned. Gray gave the bank copies of corporate resolutions authorizing him "to enter into any and all contracts whatsoever for Twin City and to do any and all acts whatsoever on such terms and conditions and for such considerations, within his discretion", the intention being "to authorize W. A. Gray as President to represent this corporation in all matters whatsoever and to confer on him the fullest possible powers of representation". The resolutions also authorized the Pioneer Bank "to honor, receive, certify or pay all instruments signed by Gray * * * even though drawn or endorsed to Gray * * * or in payment of the individual obligation of such officer, or for deposit to his personal account, and said Bank shall not be required, or be under any obligation to inquire as to the circumstances of the issuance, or use of any such instrument * * *."

Twelve days later, June 9, 1956, Gray informed the Pioneer Bank that his plans had fallen through, that "the fellow who was going to put the money in with him wouldn't go", and that there was no necessity for the loan. The transaction was then closed out by payment to the bank of principal and interest, $50,125, in the form of a check drawn by Gray as president of Twin City. None of the $50,000 credit traceable to the loan had been withdrawn from Twin City's account. Thus, except for bookkeeping purposes to reflect a loan to Gray and deposit to the account of Twin City, the $50,000 did not leave the possession of the bank. Payment of the loan simply required a reversal of bookkeeping entries and in effect the identical $50,000 originally credited to Twin City was returned to the bank.

In the interval between the loan and its repayment, Twin City had a certified audit prepared showing a credit balance of $50,000 in the Pioneer Bank. This audit report and a financial statement were used by Gray in obtaining for Twin City a contractor's performance bond from the Home Indemnity Company. Before issuing a bond, but after the $50,000 loan had been repaid, Home Indemnity Company conducted an investigation of Twin City's application for a bond. Home Indemnity's investigator obtained a routine verification from the bank that as of May 31, 1955 Twin City had a balance of $50,000 in the Pioneer Bank. The bonding company made no attempt to inquire as to whether the $50,000 or any part of it was on deposit after May 31, 1955. On completion of its investigation and after it had satisfied itself with the personal guaranty of W. A. Gray, Home Indemnity wrote the bond June 21, 1956.

Twin City had only one construction contract, a government contract at Blytheville, Arkansas. Eventually the company defaulted and Home Indemnity, as the insurer, paid bills of $52,130.42 to complete the contract.

The district judge found that the Pioneer Bank had no knowledge of the issuance of Twin City stock to Gray and no knowledge of Gray's intention to have the stock issued to himself in return for the proceeds of the loan. The district judge found that the Bank's officers and employees were not parties to any misrepresentation of any character to the bonding company. The bank acted in good faith and was as much deceived by Gray as the bonding company was deceived. Just prior to the collapse of his operations in January of 1956, Gray had nine large government construction contracts in Arkansas. The district judge stated: "The apparently substantial character of Gray's business and account with the Bank * * * justified the course of dealing and confidence the Bank's President had in him." The record amply supports the findings of the district court.

The Trustees argue that the Twin City payment of $50,125 was a voidable transfer for three reasons. (A) Twin City's payment of Gray's personal debt to the Bank was a transfer "without fair consideration" under the constructive fraud provisions of Section 67, sub. d(2) (b), 11 U.S.C.A. § 107, sub. d(2) (b). (B) The transfer was part of a scheme to hinder, delay, or defraud creditors within the meaning of Section 67, sub. d(2) (d), 11 U.S.C.A. § 107, sub. d(2) (d). (C) The payment is voidable pursuant to Section 70, sub. e of the Bankruptcy Act, under the Uniform Fiduciaries Act as adopted in Louisiana, LSA-R.S. 9:- 3801-3814, particularly LSA-R.S. 9:- 3808.

A. Payment to the bank was not a transfer by Twin City without "fair consideration" under the constructive fraud provisions of the Bankruptcy Act. 11 U.S.C.A. § 107, sub. d(2) (b).1

The Trustees argue that on completion of the loan to Gray, the $50,000 was Gray's to use as he pleased. When he chose to spend it by buying stock in Twin City, the money then belonged to Twin City. Twin City was a third party transferee, as to the bank. According to the Trustees' argument, when Twin City, the bankrupt, under no obligation to the bank, paid Gray's loan, it was the payment of a debt of another without "fair consideration", under the language of the Act, and therefore a voidable transfer.

There is no doubt that usually a diversion of corporate assets for the benefit of a third person, such as the payment of the loan of another, is a transfer without "fair consideration".2 This however is not the usual case.

The trial court found that repayment to the bank of the identical bookkeeping credit reflecting the proceeds of a loan never withdrawn was supported by a fair equivalent in value. The district judge held that under the law of Louisiana, either on the principle of quasi-contract (unjust retention of a benefit)3 or delictual responsibility,4 the circumstances gave rise to an antecedent indebtedness of Twin City sufficient...

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