McDonald v. Clearwater Shortline Ry. Co.

• Citation: 164 F. 1007
• Parties: McDONALD v. CLEARWATER SHORTLINE RY. CO.
• Decision Date: 18 July 1908
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

164 F. 1007

McDONALD v. CLEARWATER SHORTLINE RY. CO.

United States Circuit Court, D. Idaho, Northern Division.

July 18, 1908

I. N Smith, for plaintiff.

James E. Babb, for defendant.

DIETRICH District Judge.

On August 1, 1899, the Clearwater Land, Log & Lumber Company hereinafter referred to as the lumber company, entered into a written contract with the defendant, hereinafter referred to as the railroad company, by which the former was to furnish to the latter, between the date of the contract and July 20 1900, 300,000 cross-ties, at prices therein specified. Prior to January 1, 1900, deliveries were made aggregating 20,026 ties, upon account of which some payments were made, leaving due to the lumber company a balance of $378. On or about January 20, 1900, another delivery was made of 11,305 ties invoicing $3,302.52, at the contract price.

For some time after the contract was executed, the lumber company transacted its banking business with the Kendrick State Bank, but, for reasons which it is not necessary to determine, early in January, 1900, it proposed to J. B. Johnston, who was doing business in the name of the Orofino Banking Company, that it open an account with him, and, accordingly, on January 9, 1900, an understanding was reached by which the lumber company was to do all its banking business with the Orofino Banking Company, and was to deposit therein its vouchers and drafts, and in turn was to be permitted to check against its account. In speaking of the understanding of that date, the witness J. B. Johnston, whose testimony is not contradicted, said:

'Well, they had desired to open an account with me-- that is, with the Orofino Banking Company-- and promised me that voucher as soon as the ties were inspected and delivered. They also said that they would do all their banking business with the Orofino Banking Company from that time on. They promised me this $3,302.50 voucher from the railroad company.'

The bank immediately began to honor the lumber company's checks, and at the close of business on the 18th day of January the overdrafts aggregated $851.50. No other checks were paid until January 25th, upon which day the amount of the overdraft was practically doubled, and still no credits. For reasons which do not clearly appear, the lumber company, on January 21st, telegraphed to one John Willis, timber agent for the railroad company, at Brainerd, Minn., advising him that upon that day the railroad company's agent at Potlatch, where the ties were delivered, had received ties of the value of $3,302.52, and requested him to issue a check for the amount to the Orofino Banking Company, explaining that the money was needed, and that the lumber company could get the money from the bank if the railroad company would agree to issue the voucher to the bank. On January 24th, Willis telegraphed to the bank from Duluth, advising the latter that the railroad company would accept the order of the lumber company for $3,302.52, if properly drawn to cover the January invoice of ties, and upon the same day a formal order, directed to the treasurer of the railroad company, was executed by the lumber company and delivered to the bank. The receipt of this by Willis was acknowledged on January 28th, with the information that he had requested the treasurer to hurry the voucher forward. Other advances were thereupon made by the bank to the lumber company, almost all of which were prior to February 5th, and also some deposits to the credit of the lumber company, the excess of the debits over the credits being $43.27 less than the $3,302.52.

Whether any voucher for the $3,302.52 was ever delivered to the bank is not made to appear, but, for some reason not disclosed, the railroad company did not, in accordance with the understanding of the parties, make payment to the bank; perhaps its failure in that respect is accounted for by current and subsequent events hereinafter referred to, which may also explain why credit for the amount of the promised voucher was not given upon the books of the bank.

Scarcely had the correspondence to which reference has been made taken place before the troubles of the lumber company began. The United States, claiming that they had been wrongfully cut upon public lands, seized the delivered ties, but a few days later released them, and took possession of other ties which had been cut but were still in the woods. Almost immediately thereafter, one of the creditors of the lumber company caused the 11,305 ties, for which the voucher was to be issued, to be attached by the sheriff of Shoshone county. Thereafter, on April 3, 1900, a petition in bankruptcy was filed by several of the creditors of the lumber company, and accordingly an order adjudicating it a bankrupt was entered on June 8, 1900, and, in due time, a trustee was appointed. On or about June 29, 1900, the Orofino Banking Company assigned to the Exchange National Bank of Spokane its interest in the claim against the railroad company for the $3,302.52, and upon September 5, 1902, the railroad company paid to that bank the full amount, less the sum of $244.96, which had theretofore been paid by it to the United States in settlement of suits which had been brought against it and the lumber company for damages for alleged trespass in cutting and removing the ties from public lands.

Charles L. McDonald, the plaintiff herein, as trustee in bankruptcy for the lumber company, commenced this action against the defendant in the state district court on October 2, 1903. In his complaint he ignores the existence of the order or assignment of the lumber company to the banking company, and states a cause of action at law for the recovery, upon the contract referred to, of $3,680.52, the same being the aggregate amount of the $378 and the $3,302.52. By proper proceedings the cause was removed to this court, and thereafter the defendant answered, pleading the assignment to the Orofino Banking Company and the payment by the defendant to the Exchange National Bank, and also setting forth certain items of counterclaim. A jury was waived, and the cause has been submitted for decision upon a stipulation of facts, together with the deposition of the banker, J. B. Johnston.

In plaintiff's reply brief he, for the first time, objects to the validity of the assignment by the lumber company to the bank, that the order or written assignment does not bear an internal revenue stamp. There must be some misapprehension in this respect, for in paragraph 7 of the stipulation of facts there is set forth a copy of the order or assignment, dated January 24, 1900, bearing this notation: 'Int. Rev. Stamp 2 cts. affixed & cancelled 1/24/1900 C.L.L. & L. Co.'

The principal and most serious contention urged by the plaintiff is that, assuming the assignment to have been valid between the parties, it constituted a preference under the bankruptcy law, and may therefore be avoided by the trustee in bankruptcy. By counsel for the defendant it is elaborately argued that, even if the assignment be deemed to be a preference, the plaintiff cannot proceed, in an action at law, upon the theory that it was absolutely void, but his remedy was by a suit in equity to set aside the assignment and recover the property, or the value of the property, thus transferred by the bankrupt. In consideration of the conclusion I have reached upon the merits, it is not necessary to determine whether such relief is grantable exclusively by a court of equity. Assuming, but not deciding, that the trustee has not mistaken his remedy, and further adopting the view, most favorable to plaintiff, that the rights of defendant are no greater than the bank would have, had the amount of the claim been paid to it, and had this action been brought against it to recover the amount so paid, should the plaintiff succeed? The transactions took place in 1900, and hence to the provisions of the general bankruptcy Act of 1898, prior to amendment of 1903, we must look for the law. By subdivision 15 of section 1 of this act (Act July 1, 1898, c. 541, 30 Stat. 545 (U.S. Comp. St. 1901, p. 3419)) it is provided that:

'A person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay his debts.'

By subdivision 'a' of section 60 it is provided that:

'A person shall be deemed to have given a preference if, being insolvent, he has procured, or suffered a judgment to be entered against him in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class.'

It is upon this latter provision that the plaintiff lays especial emphasis, and upon it mainly he relies for his right to recover. Undoubtedly the assignment under consideration was a 'transfer' of 'property.' In order that the case may be brought within the scope of this subdivision however, it was incumbent upon the plaintiff to show that the assignment was made when the lumber company was 'insolvent,' and, further, that the effect of such transfer was to enable the bank to obtain a greater percentage of its debt than any other creditor of the same class. That these conditions must appear is conceded by the plaintiff; and it is further conceded that a preference is not voidable unless it is given in satisfaction of an antecedent debt-- that is, a debt which existed at the time the...