Stern v. Paper

• Decision Date: 10 December 1910
• Citation: 183 F. 228
• Parties: STERN v. PAPER et al.
• Court: U.S. District Court — District of North Dakota

183 F. 228

STERN v. PAPER et al.

United States District Court, D. North Dakota.

December 10, 1910

Syllabus by the Court

'Fair valuation,' in subdivision 15, Sec. 1, of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 544 (U.S. Comp. St. 1901, p. 3419)), means such a price as a capable and diligent business man could presently obtain for the property after conferring with those accustomed to buy such property.

For other definitions, see Words and Phrases, vol. 3, pp. 2650 2651.)

'Reasonable cause to believe,' in section 60b of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901 p. 3445)), covers substantially the same field as 'notice,' in determining whether a person is a bona fide purchaser of property.

For other definitions, see Words and Phrases, vol. 7, pp. 5956 5957.)

Facts which would put an intelligent business man upon inquiry constitute 'reasonable cause to believe,' under section 60b of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3445)), if intent to prefer would be discovered by following up the inquiry.

'Fear' or 'suspicion' of a preference constitute 'reasonable cause to believe,' under section 60b of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3445)), if they would incite an intelligent business man to an inquiry which would disclose a preferential intent.

A guarantor is a 'creditor' within the meaning of section 60b of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3445)), relating to the giving of preferences to creditors.

For other definitions, see Words and Phrases, vol. 2, pp 1713-1727; vol. 8, pp. 7622, 7623.)

Richmond, Jackman & Swanson, for complainant.

Ball, Watson, Young & Lawrence, for defendants.

AMIDON District Judge.

The complainant is the trustee in bankruptcy of Dave Naftalin, and the action is prosecuted by a creditor in his name to recover a preference. Naftalin had been engaged in the clothing business at Fargo since March, 1904, carrying a stock of ready-made clothing, gents' furnishing goods, and boots and shoes. In March, 1907, he gave his note to the First National Bank of that city for a loan of $3,000, payment of which was guaranteed by the defendants. This note was renewed from time to time at 90-day periods. The last renewal occurred on December 13, 1907, and would mature March 13, 1908; $100 had been paid on the principal of the debt. About February 3, 1908, the bankrupt, for the purpose of paying this note, sold and delivered to the defendants out of his stock of merchandise goods whose cost price was $4,400. They were turned in at $3,140. March 24, 1908, Naftalin was adjudged a bankrupt on a voluntary petition, and the plaintiff was afterwards duly elected trustee of his estate. This suit is brought against the defendants to recover the goods or their value.

The case gives rise to three principal questions:

(1) Was the bankrupt insolvent at the time of the transfer?

(2) Were the defendants creditors of the bankrupt?

(3) Did the defendants have reasonable cause to believe that the transfer was intended as a preference?

The evidence establishes the bankrupt's insolvency at the time of the transfer beyond any reasonable doubt. The stock before the transfer inventoried at cost, $13,851. The sale removed from this stock goods of the cost value of $4,400, thus leaving a balance of $9,451. The stock contained some goods that were three or four years old. Just what proportion of them were of that age the evidence does not disclose. They consisted, according to the testimony, of heavy winter goods. The season of the year for their sale closed with the month of January, and it would have been necessary to carry the greater part of them over until the ensuing winter before they would be in demand. The defendants, when they purchased the goods, discounted the cost price nearly 30 per cent. The stock on hand at the time of the adjudication was appraised at $3,316.05 by three merchants having large experience in such matters. Between the transfer to defendants and the bankruptcy, there was no change in the condition of the goods, and the total sales did not exceed $200. The only property owned by the bankrupt outside of his stock in trade consisted of fixtures and accounts. These accounts had been accruing for four years. Their face value was $2,200. The fixtures at some time had been inventoried at $1,800. The bankrupt testifies that the accounts and fixtures 'stood' him at these sums. The appraisers fixed the value of the accounts at $249.38, and the fixtures at $357. The record shows that the trustee, who is a skillful man in such matters, endeavored to dispose of this bankrupt estate at the best price possible, and as the result of his efforts the entire estate was sold on May 11, 1908, for $2,946. It is urged by counsel for the defendants that no confidence can be placed in the appraisement because it is claimed the appraisers valued the goods as a bankrupt stock. That would have been a violation of their duty, and the court cannot assume that they proceeded in that manner. It was their duty to appraise the property at its fair market value. The bankruptcy had nothing to do with the performance of that duty. It was the business of the appraisers simply to look at the several articles belonging to the estate, and determine what they were fairly worth. I am satisfied from the evidence that they followed that course. I am confirmed in this by the testimony of Mr. Stern, who is disinterested and is qualified by many years of experience as a merchant in the same line, to speak of the value of the estate, and he has testified that the valuation of the appraisers represented the fair market value of the property. According to that valuation, the entire estate was worth $3,922.43, and at a liberal estimate could not have been worth at the time of this transfer to exceed $5,000.

'Fair valuation,' within the meaning of subdivision 15 of section 1 of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 544 (U.S. Comp. St. 1901, p. 3419)), means a value that can be made promptly effective by the owner of property 'to pay his debts.' That is the language of this liberal statute. It ought not to be enlarged. Such a value excludes, on the one hand, the sacrifice price that would result from an execution or foreclosure sale, and, on the other hand, the retail price that could be realized in the slow process of trade. This latter value should be excluded because it could only be gained by large expense and the many risks of a mercantile venture. 'Fair valuation' means such a price as a capable and diligent business man could presently obtain for the property after conferring with those accustomed to buy such property. Such a value will depend upon many circumstances, such as the age and condition of the stock, the season of the year, and the state of trade. Under the evidence in this case I am satisfied that the fair value of Naftalin's property, exclusive of that transferred, could not possibly have exceeded $5,000. His indebtedness then amounted to $10,407.21. This demonstrates his insolvency.

That defendants were 'creditors,' within the meaning of section 60 of the bankruptcy act, is settled for this circuit by Kobusch v. Hand, 156 F. 660, 84 C.C.A. 372, 18 L.R.A. (N.S.) 660, and Huttig Manufacturing Co. v. Edwards, 160 F. 619, 87 C.C.A. 521. Not only were the defendants guarantors of the note, but the evidence satisfies me that Mr. Paper was the chief author of the project for the sale of the goods to his firm in order to protect them from their liability upon the note. Counsel for defendants urges that this was an independent transaction, and had no reference to the payment of the note. The facts do not support that contention. Naftalin testifies as follows:

'Q. How did you happen to sell these goods to Paper & Yoffey?

'A. Well, sir, I had a heavy winter stock at the time, and I had lots of bills to pay, and in the meantime I got notice from the First National Bank saying that they would like to have me take up the paper. I went to Mr. Paper, and told him that if I could sell so many goods at a price to raise about 3,100, 3,150 or 3,200 to clean up some of the accounts, because those goods I have got in hand the biggest part of it I cannot use until next fall, and, if I could raise the amount of money to pay off the bank, that would relieve me of paying 10 per cent. interest. So he said he would talk it over with his manager, and maybe they can use the goods; if they can, they will have it. Then he decided finally to buy the goods, and I sold it to him at those figures.'

He tried to qualify this testimony later, but I am satisfied that it gives the true origin of the sale of the goods. It was a scheme developed by the defendants and the bankrupt to meet the emergency that arose when the bank demanded the payment of the note. Naftalin had no means with which to meet that crisis. He had already exhausted every resource to raise money to pay pressing claims, and there were still many such claims in the hands of banks and attorneys clamoring for payment. The extraordinary sale was necessary to save the defendants as guarantors, and was devised for that purpose. The theory that it was an expedient hit upon to aid the bankrupt to meet the pressing claims of mercantile creditors breaks down before the evidence. The very day the goods were delivered, and before the inventories were footed up Naftalin called upon the defendants for $2,950 with which to pay the note at the bank, and clearly stated that purpose to them. At that time there were hundreds of dollars of creditors' claims in the hands of local collectors...