Sams v. First Nat. Bank of Meridian

• Decision Date: 23 May 1938
• Docket Number: 33219
• Citation: 181 So. 320,182 Miss. 777
• Court: Mississippi Supreme Court
• Parties: SAMS v. FIRST NAT. BANK OF MERIDIAN

181 So. 320

182 Miss. 777

SAMS v. FIRST NAT. BANK OF MERIDIAN

No. 33219

Supreme Court of Mississippi

May 23, 1938

Division A

Suggestion Of Error Overruled August 27, 1938.

APPEAL from the chancery court of Lauderdale county, HON. A. B AMIS, SR., Chancellor.

Suit by L. F. Sams, trustee in bankruptcy of the estate of Simon K Watson, against the First National Bank, Meridian, Miss., to recover as a voidable preference sums paid bank by bankrupt within period of four months prior to adjudication in bankruptcy. From the decree rendered, the complainant appeals, and the defendant cross-appeals. Decree reversed and rendered on the direct appeal, and affirmed on the cross-appeal.

Reversed and decree here on direct appeal, and affirmed on cross-appeal.

Lyle V. Corey, of Meridian, for appellant.

As a general proposition, an offset is to be distinguished from a voidable preference in that one of the elements of a voidable preference is lacking. One of the important elements of such a preference is a voluntary action on the part of the bankrupt. Such action is completely missing from an offset unless it could be shown that the bankrupt made deposits for the purpose of making such offset possible. So, if, in the instant case, the bankrupt had carried a substantial amount on deposit at all times with the defendant bank and the bank had then exercised its right of offset, we concede that there would have been no voidable preference. But such were not the facts here. The bank did not make any offset, nor did the bankrupt carry a balance on hand which would permit any offset.

In passing upon the payment made in January, 1936, the Chancellor recognized the correct rule of law that the making of a payment under such circumstances as existed in this case constituted a voidable preference. There was no showing as to how that January payment was made. Presumably, it was made by cash, the checking account having been closed eight days prior thereto. If the making of such payment by cash constituted a voidable preference, does not the making of such payment by check, when it is necessary to immediately deposit the cash to pay the check, constitute the same ? Where, we ask, is the distinction between the two ? The procedure is slightly different but the ultimate result is identical. We respectfully submit that, if one is voidable preference, both are.

Counsel for the defendant bank relied, in the court below, upon the decision of the United States Supreme Court in the case of Studley v. Boylstone National Bank, 229 U.S. 523, 57 L.Ed. 1313, 33 S.Ct. 806, 30 A. B. R. 161. That case is to be distinguished from the case at bar in several particulars. First, the defendant bank in that case did on several occasions exercise its right of offset. Second, the bankrupt carried a substantial balance on hand in its checking account with the defendant bank, and it was unnecessary to make deposits on the same day to cover the checks given to the defendant bank. Third, the entire opinion in that case was predicated upon the finding that the defendant bank did not have reasonable cause to know of the bankrupt's insolvency.

In the case at bar, the money actually changed hands on the very days that the notes were paid. There was no offset and no opportunity for offset of any substantial amount. There was no mutual indebtedness except for very small balances ranging from two to five percent of the amount of one note. There can be an offset or a right of offset only where there is a mutual indebtedness, and except as to those small balances, no such right ever came into existence in this case. The bankrupt transferred the money at the very time that the payments were made. We respectfully submit that the opinion in the Studley case falls far short of being authority for the Chancellor's finding in this case.

The authorities seem to be unanimous that where the deposits are made for the purpose of enabling the bank to obtain payment of its debt, there is a preferential transfer.

4 Remington on Bankruptcy, sec. 1720; Bank of California v. Brainard, 3 F.2d 3, 5 A. B. R. (N.S.) 545.

Since the bankrupt was insolvent at the time the payments were made and since the defendant bank had reasonable cause to know of such insolvency, the making of these payments constituted voidable preferences within the meaning of Section 60-b of the Bankruptcy Act, and the trustee is entitled to recovery therefor.

Chambers & Trenholm, of Jackson, for appellant.

The principal question is whether under all of the circumstances the deposits made with the defendant bank by the bankrupt during the four months period, and particularly those which enabled the bank to collect the checks payable to it, were made in the usual course of business. The secondary question is the effect of the giving of checks to the bank by the bankrupt, rather than an exercise by the bank of the right of off-set, if it had such right.

As far back as 1910 the Supreme Court of New Mexico, in Schmidt v. Bank of Commerce, 110 P. 613, 25 A. B. R. 904, held that a bank was not entitled to offset, where the deposits were made on its inducement for the purpose of permitting an off-set. Certainly, the paying of its own checks in preference to those of others was, under the facts here, more than the equivalent of inducing the deposits for that purpose.

Ernst v. Mechanics and Metals National Bank, 201 F. 664, 29 A. B. R. 298; Walsh v. First National Bank, 201 F. 522, 29 A. B. R. 118; In re Starkweather & Albert, 30 A. B. R. 743; Mechanics & Metals National Bank v. Ernst, 231 U.S. 60; Matter of National Lbr. Co., 212 F. 928, 32 A. B. R. 389; Knoll v. Commercial Trust Co., 94 Afl. 750, 35 A. B. R. 379; Johnson v. Gratiot County State Bank, 160 N.W. 544, 38 A. B. R. 518; Fourth National Bank v. smith, 240 F. 19, 38 A. B. R. 771; Merrimack Natl. Bank v. Bailey, 289 F. 468, 5 A. B. R. (N.S.) 633; Bank of California v. Brainard, 3 F.2d 3, 5 A. B. R. (N.S.) 545; Ingrain v. Bank of Cottage Grove, 29 F.2d 86, 13 A. B. R. (N.S.) 198.

The test was well stated by District Judge Watson, Middle District of Pennsylvania, in 1931, in the case of McGuigan, Trustee, v. Dime Bank T. & T. Co., 47 F.2d 760, 17 A. B. R. (N.S.) 764, in this language: "The right of set-off is given by the bankruptcy act itself, and the test in cases where the right of set-off by a bank is questioned is always whether, after insolvency, the money was deposited for the purpose of enabling the bank to secure a preference." We ask the question here: Is it not manifest from the whole record that the deposits were made by Watson for the purpose of permitting the bank to pay the checks given it, not the checks held by others? The bank evidently thought so, for it gave itself the preference, as admitted by the cashier.

Bank of Commerce & Trust Co. v. Hatcher, 50 F.2d 719, 18 A. B. R. (N.S.) 126.

We respectfully submit that the Chancellor erred in finding that the deposits were made in the usual course of business, and that the bank was within its right in accepting payment as it could have set-off the bankrupt's notes against his account.

Neville & Minniece, of Meridian, for appellee.

We call the court's attention to the case of Studley, Trustee, v. Boylston National Bank of Boston, 229 U.S. 523, 57 L.Ed. 1313. In this case the bank had within four months of bankruptcy received checks from the debtor and also had charged notes held by the bank against the bank account of the debtor. In reply to the argument on behalf of the trustee in the Studley case that the giving of checks constituted an unlawful preference, the court said: "These were mutual debts, and if, on the date the first note became due, the Collver Company had failed to pay it, the bank could have enforced its banker's lien or its right of set-off, by applying $ 5,000 of the deposits in payment of the note which matured that day, and so on as each of the other notes became duel It cannot have been illegal for the parties on September 12, 20, 30, October 3 and 14, 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."

American Bank & Trust Co. v. Coppard, 227 Fed: 597; Jandrew v. Guaranty State Bank, 294 F. 530; Grant v. First National Bank of Monmouth, 97 U.S. 81, 24 L.Ed. 971.

We submit that the Chancellor was correct in holding that the payments made by the bankruptcy to the bank by check did not constitute unlawful preference. The Chancellor found from the evidence that the deposits made by the bankrupt were made in the usual course of business, and in this finding he is amply supported by the evidence.

The Supreme Court of the United States in the case of Grant v. First National Bank of Monmouth, 97 U.S. 81, 24 L.Ed 971, said "It is not enough that a creditor has some cause to suspect insolvency of his debtor, but he must have such a...