Putnam v. United States Trust Co.

• Decision Date: 03 March 1916
• Citation: 223 Mass. 199,111 N.E. 969
• Parties: PUTNAM v. UNITED STATES TRUST CO.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

223 Mass. 199

111 N.E. 969

PUTNAM

v.UNITED STATES TRUST CO.

Supreme Judicial Court of Massachusetts, Suffolk.

March 3, 1916.

Appeal from Supreme Judicial Court, Suffolk County.

Action by Alfred W. Putnam, trustee in bankruptcy of the estate of Aaron Mendelsohn, against the United States Trust Company. Decree for plaintiff in part, and both parties appeal. Affirmed.

Lee M. Friedman, Swift, Friedman & Atherton, and Alfred W. Putnam, and of Boston, for complainant.

A. E. Pillsbury and G. M. Palmer, both of Boston, for defendant.

RUGG, C. J.

This is a suit by the trustee in bankruptcy of one Mendelsohn, to recover money alleged to have been paid by the bankrupt to the defendant in fraud of the Bankruptcy Act. The facts briefly stated are that Mendelsohn, a stranger to the officers of the defendant, was introduced to them on December 22, 1911, as one all right to do business with, by his attorney, who was well and favorably known to them. He applied for a loan of $10,000, offering his own notes indorsed by one C. H. Tappan. The officers of the defendant, through inquiry of other banks, were assured of the ample resources and credit of Tappan and discounted three notes, for $3,000, $3,500, and $3,500, on four, five and six months' time respectively, made and indorsed by Mendelsohn and apparently indorsed also by C. H. Tappan, and the proceeds were credited to Mendelsohn on the books of the defendant. In consequence of notice sent to C. H. Tappan according to its custom by the defendant, it was told on December 27, 1911, by the son of Mr. Tappan, that his father had indorsed no such notes. Thereupon the defendant at once sent for Mendelsohn, told him the information received as to the indorsements upon his notes, and asked him to take up the notes at once. Mendelsohn declared the indorsements genuine, and that C. H. Tappan was an old friend with whom he had done business and who did not want his family to know about his indorsement of the notes. Mendelsohn offered to go to Attleboro with any representative of the defendant to see C. H. Tappan. But he acceded to the demand that the matter be closed up, becausethe president of the defendant stated that he did not want paper as to the indorsement of which any question was made, and thereupon gave his check to the defendant for $5,500, the balance left on his account with the defendant being then $21.26, which he said he wanted to have remain to cover some outstanding checks, and promised to pay the balance of the notes on that day or the next. He did not present himself again until January 2, 1912, when he deposited $500 with the defendant and immediately drew a check for that amount to its order, which was credited upon one of his notes. This was repeated on January 9th and 16th. Mendelsohn was insolvent on December 22d. When the three payments of $500 each were made the defendant knew he was insolvent. He was petitioned into bankruptcy on January 27, 1912, and was adjudicated a bankrupt on May 23, 1912.

The single justice, who found these facts, also found and ruled that the defendant was entitled to hold the $5,500, that amount being on deposit with the defendant to Mendelsohn's credit, and he then owing the defendant a larger sum, and that under these circumstances it was not a preference condemned by the bankruptcy act. This imports a finding of all essential and subsidiary facts necessary to sustain the conclusion reached. Such finding will not be set aside unless it appears to be wrong.

[1][2][3] There are two grounds upon either of which this finding and ruling can stand. The first is that it was the exercise by the parties of the right of set-off. The notes of Mendelsohn, the bankrupt, held by the defendant, although not then due, were provable against his estate in bankruptcy. Section 63a(1) of the Bankruptcy Act, U. S. Sts. of 1898, c. 541. Therefore they were subject to set-off under section 68 of the act, and the defendant could have set them off against his deposits. There could be no contention that this could not be done if bankruptcy proceedings had been instituted on December 27, 1911, at the time the transaction as to the $5,500 occurred. Germania Savs. Bank v. Loeb, 188 Fed. 285, 110 C. C. A. 263;New York County Bank v. Massey, 192 U. S. 138, 24 Sup. Ct. 199, 48 L. Ed. 380. Generally, instances of the exercise of the right of set-off have occurred either at the adjudication of bankruptcy or, if before then, when the note of the bank was due or overdue. Statements to the effect that the right of set-off may be exercised only when the note has matured are to be found in some of the cases. Shale v. Farmers' Bank, 82 Kan. 649, 109 Pac. 408;Irish v. Citizens' Trust Co. (D. C.) 163 Fed. 880. It is true that in this commonwealth there is no right of set-off of an unmatured note even in cases when the other party is insolvent. Jump v. Leon, 192 Mass. 511, 78 N. E. 532,116 Am. St. Rep. 265, where the cases are collected. But this rule, which sometimes appears harsh in operation, does not prevail in equity in the federal courts. Schuler v. Israel, 120 U. S. 506, 7 Sup. Ct. 648, 30 L. Ed. 707;Carr v. Hamilton, 129 U. S. 252, 9 Sup. Ct. 295, 32 L. Ed. 669;No. Chicago Rolling Mill Co. v. St. Louis Ore & Steel Co., 152 U. S. 596, 14 Sup. Ct. 710, 38 L. Ed. 565. It is settled that the time when the right of set-off may be exercised is not restricted to the adjudication, but may be valid, if otherwise unassailable, at any time within the four months before bankruptcy. Studley v. Boylston Nat. Bank, 229 U. S. 523, 33 Sup. Ct. 806, 57 L. Ed. 1313. In the opinion in that case it was said at page 529 of 229 U. S., at page 809 of 33 Sup. Ct.,57 L. Ed. 1313:

‘It cannot have been illegal for the parties on September 12th, 20th, and 30th, and October 3d and 14th to do what the law would have required the trustee to do in stating the account after the petition was filed on December 16, 1910. No money passed in either instance; for, whether the checks for $5,000 were paid or notes for $5,000 were charged, was, in either event, a book entry equivalent to the voluntary exercise by the parties of the right of set-off. The Bankruptcy Act recognizes this right and it cannot be taken away by construction because of the possibility that it may be abused. The remedy against that evil is found in the fact that the trustee is authorized to sue and recover if it is shown that after insolvency the money was deposited for the purpose of enabling a bank or other creditor to secure a preference. But to deny the right of set-off, in cases like this, would in many cases make banks hesitate to honor checks given to third persons, would precipitate bankruptcy and so interfere with the course of business as to produce evils of serious and far-reaching consequence.’

This statement, although used as to rights of set-off exercised at the maturity of notes, seems to be phrased advisedly with sufficient broadness to be equally applicable to the equitable exercise of the right at a time when there is in fact bankruptcy, although not manifested by proceedings in the court. The principle declared is not restricted in its operation to matured notes and in reason seems to be as applicable to cases like the one at bar as to the one there under consideration. It cannot be assumed that the comprehensive statement of the principle was inadvertent or unconsidered. That principle is that the parties lawfully may do beforehand the exact thing which the law requires to be done when bankruptcy is established. Of course, if done before the bankruptcy, then the question of preference becomes involved and must be determined. But that is a fact ordinarily to be found in the light of all the circumstances. If it is not found that the bank had reasonable cause to believe that the payment of the notes would act as a preference, then the transaction will stand. If between the parties the right of set-off is exercised as to an unmatured note within the four months preceding the petition in bankruptcy, it cannot be ruled as matter of law that there has been a preference, but it must be determined as a fact. This was what was done in Ridge Avenue Bank v....