National Bank of Newport v. National Herkimer County Bank

• Decision Date: 27 May 1912
• Docket Number: No. 172,172
• Citation: 225 U.S. 178,32 S.Ct. 633,56 L.Ed. 1042
• Parties: NATIONAL BANK OF NEWPORT, New York, Appt., v. NATIONAL HERKIMER COUNTY BANK, of Little Falls
• Court: U.S. Supreme Court

225 U.S. 178

32 S.Ct. 633

56 L.Ed. 1042

NATIONAL BANK OF NEWPORT, New York, Appt.,

v NATIONAL HERKIMER COUNTY BANK, of Little Falls.

No. 172.

Argued February 28 and 29, 1912.

Decided May 27, 1912.

Mr. Henry J. Cookinham for appellant.

[Argument of Counsel from pages 178-180 intentionally omitted]Mr. Myron G. Bronner for appellee.

Mr. Justice Hughesdelivered the opinion of the court:

This suit was brought in the district court of the United States for the northern district of New York by Charles B. Mason, as trustee in bankruptcy of the Newport Knitting Company, to recover the amount of an alleged preference.Decree for the complainant was reversed by the circuit court of appeals, which remanded the cause with instruction to dismiss the bill.97 C. C. A. 155, 172 Fed. 529.Subsequently, the trustee assigned the claim in suit to the National Bank of Newport, New York, which was substituted as complainant and brought this appeal.

The bankrupt, the Newport Knitting Company, was organized in 1900, by Titus Sheard and his associates, and was engaged in the manufacture of knit goods at Newport, New York.Proccedings for its voluntary dissolution were begun in October, 1903, and on December 30, 1903, a petition in bankruptcy was filed against it.It was adjudged a bankrupt on January 23, 1904.

Several of the officers and directors of this company were also officers and directors of a corporation known as the Titus Sheard Company, which manufactured knit goods at Little Falls.Titus Sheard was the leading spirit in both corporations; in each his son-in-law was the secretary and his nephew the general manager.The books of the Newport Knitting Company were kept at the office of the Titus Sheard Company.It does not appear that either company held stock in the other, nor is it shown to what extent the same persons had a stock interest in both.And upon the record the conclusion must be that, while the management of the two concerns was largely in the same hands, they were distinct organizations, conducting separate businesses.

The Titus Sheard Company had a deposit account and discounted its parper with the defendant, the National Herkimer County Bank of Little Falls, of which Sheard was a director.The Newport Knitting Company was not a customer of the defendant bank, but kept its account with the National Bank of Newport.

The transaction which is alleged to constitute a perference was as follows: On January 7, 1901, the Newport Knitting Company gave its note for $5,773.05, at four months, to the Titus Sheard Company, to pay for machinery and supplies.The Titus Sheard Company indorsed the note and had it discounted by the defendant bank, receiving the avails for its own use.The note was reduced by part payment to $5,000, and for this sum it was renewed every four months with like indorsement, the last renewal of this sort being on May 11, 1903.

In August, 1903, the defendant bank held a large amount of paper made or indorsed by the Titus Sheard Company, and insisted upon security.Thereupon the Titus Sheard Company submitted to the bank a statement of its af- fairs, and on August 11, 1903, executed an instrument, also signed by Mr. Sheard and certain other officers individually, by which, after reciting the determination to liquidate its business, they purported to pledge its 'mill property, all the machinery in the same, and the warehouse, together with all our assets of our company, and also the individual properties, as per list hereto attached, to secure the National Herkimer County Bank for all notes of ours which they now hold, or may hereafter hold, and for all paper indorsed by us, now held by the bank, or that may be held by it in the future.'This agreement evidently contemplated that the Titus Sheard Company should continue in possession of its property and should have charge of the winding up of its offairs, on the understanding expressed, which was, in substance, that the property should be speedily converted into money, that bills payable held by creditors other than the bank should be renewed so far as possible, and that 'all surplus moneys, as fast as collected, not required to pay the outstanding notes held by other creditors,' should be applied in payment of the indebtedness to the bank.It was declared to be the intention to dispose of the property so that all the indebtedness should be paid before January 1, 1904.

On August 22, 1903, there was substituted for the above-mentioned note of the Newport Knitting Company, indorsed by the Titus Sheard Company and held by the bank, a new three months' note of the Newport Knitting Company for the same amount, similarly indorsed; and the Titus Sheard Company secured this note by the delivery to the bank of specific assignments of its bills receivable, amounting to $6,300.On September 26, 1903, before maturity, the Titus Sheard Company paid to the bank the amount of this note, less accrued interest, $4,953.33, and took up the note and collateral.This payment was made by the Titus Sheard Company, acting in its own behalf, by a check drawn against the funds to its credit in the bank.The amount so paid was then charged by that company to the Newport Knitting Company, to which it was indebted on open account in a larger sum; and on the books of the Newport Knitting Company a corresponding credit was given to the Titus Sheard Company, So far as appears, this charge of the sum paid on the note against the amount owing to the Newport Knitting Company was not known to the bank.

It is insisted that this transaction amounted to a preference of the bank by the Newport Knitting Company.It is said that 'the bankrupt parted with property to the amount of the note, and the bank received it and was benefited to that amount,' of the detriment of the other creditors of the Newport Knitting Company, then insolvent; or, as the district court put it, that 'a short cut was taken by common consent, and the check was passed to the bank and the amount charged to the Knitting Company, so that it, in fact, paid the note.'

The pertinent provisions of the bankruptcy act as they stood at the time the transaction occurred were as follows:

'Sec. 60.Preferred Creditors.—a.A person shall be deemed to have given a preference, if, being insolvent, he has, within four months...