Reed v. Guaranty Sec. Corp.

• Decision Date: 01 August 1923
• Docket Number: 1661.,1106
• Citation: 291 F. 580
• Parties: REED et al. v. GUARANTY SECURITY CORPORATION (two cases).
• Court: U.S. District Court — District of Massachusetts

291 F. 580

REED et al. v. GUARANTY SECURITY CORPORATION (two cases).

Nos. 1106, 1661.

United States District Court, D. Massachusetts.

August 1, 1923

Geo. W Reed, of Boston, Mass., for plaintiffs.

Charles M. Ludden, of Boston, Mass., for defendant.

LOWELL District Judge.

These were two bills in equity, brought by the trustees in bankruptcy of the Massachusetts Motors Company to set aside alleged preferences. The first concerned a payment of money and the second a transfer of motorcars. In the first case the defendant contended that a bill in equity would not lie, as there was a complete and adequate remedy at law. This question will be considered before proceeding to the merits.

There are several authorities which support the contentions of the defendant, the most important being Warmath v O'Daniel, 159 F. 87, 86 C.C.A. 277, 16 L.R.A. (N.S.) 414; Sessler v. Nemcof (D.C.) 183 F. 656; First State Bank v. Spencer, 219 F. 503, 135 C.C.A. 253; Simpson v. Western Hardware Co. (D.C.) 227 F. 304. The leading case is Warmath v. O'Daniel.

Cases taking the opposite view are Cox v. Wall (D.C.) 99 F. 546; Pond v. N.Y. bank (D.C.) 124 F. 992; Re Plant (D.C.) 148 F.

37; Parker v. Black (D.C.) 143 F. 560; Id., 151 F. 18 80 C.C.A. 484; Parker v. Sherman, 212 F. 917, 129 C.C.A. 437.

The practice in this circuit since the well-considered case of Goodenow v. Milliken, Fed. Cas. No. 5,535, decided by Judge Fox in 1871, has been to allow recovery of a money preference by a bill in equity. See, for instance, Cohen v. Goldman, 250 F. 599, 162 C.C.A. 615; Tremont Tr. Co. v. Cohen (C.C.A.) 263 F. 81.

Judge Brown, in Johnson v. Hanley Co. (D.C.) 188 F. 752, seemed to be doubtful of the matter, but as he did not cite the case of Goodenow v. Milliken I do not think he could have had that authority in mind. The rule which prevails in this circuit seems to me to be supported by the better reasoning. Bankruptcy is equitable in its nature. A preference is a creature of the bankruptcy statute, and was unknown to the common law. It is a technical fraud, and was developed by the equity judges of England (Lowell, Bankruptcy, p. 42 et seq.), and did not appear in any statute there until 1869 (Id. p. 44). The amendment of 1903 to the Bankruptcy Act, which was passed on account of the decision of the case of Bardes v. Bank, 178 U.S. 524, 20 Sup.Ct. 1000, 44 L.Ed. 1175, provided that suits to set aside preferences might be brought in courts of bankruptcy, which, except in the few instances mentioned in the Bankruptcy Act, are courts of equitable powers only. Following the practice in this circuit, I denied the defendant's motion to dismiss the first suit and heard them both.

The defendant lent money to the bankrupt and took as security instruments covering certain motorcars, one of the terms of the instrument being that title to the cars should not pass until the loans were paid. By the arrangement between the parties as soon as a car was sold, the loan on that car was to be paid at once. This arrangement was carried out at first, but late in July the defendant learned that the bankrupt had sold cars without paying the loans on them. The amount of indebtedness on this account was about $21,000. The defendant threatened the officers of the bankrupt with arrest if this amount was not paid. Finally, on August 10th, $10,000 was paid to the defendant, and this payment is alleged to be a preference. After this, on the 25th of August, the defendant took possession of all the cars on which it had loaned money. Three days afterwards an involuntary petition in bankruptcy was filed against the bankrupt. This transfer, not being prevented by the bankrupt, is also alleged to be a preference.

The bankrupt was insolvent in July. If the defendant had inquired on the 10th of August, it would have discovered its insolvent condition. The attitude of the defendant is well shown by the testimony of Baker, its general manager. He said:

'Where we take collateral we have no occasion to inquire into the condition of the borrower.'

The fact that the bankrupt could pay only $10,000 out of a debt of $21,000, which arose out of a transaction which the defendant regarded as criminal, put the defendant on its inquiry. Watchmaker v. Barnes, 259 F. 783, 170 C.C.A. 583.

I find that, when the defendant received the payment of $10,000 on August 10...