Swartz v. Frank

• Citation: 183 Mo. 438,82 S.W. 60
• Parties: SWARTZ v. FRANK.
• Decision Date: 01 July 1904
• Court: United States State Supreme Court of Missouri

82 S.W. 60

183 Mo. 438

SWARTZ v. FRANK.

Supreme Court of Missouri, Division No. 1.

July 1, 1904.

BANKRUPTCY — PREFERENCES — PAYMENTS TO ATTORNEYS — INSOLVENCY — EVIDENCE — TRUSTEES — ACTION TO AVOID PREFERENCE — LACHES.

1. Under Bankr. Act July 1, 1898, c. 541, § 60, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445], providing that if a debtor, in contemplation of bankruptcy, pays money or transfers property to an attorney for services, the transaction may be examined by the court, and only the amount held by the court to be a reasonable amount shall be deemed valid, and excess may be recovered by the trustee. A payment of fees to an attorney, by a firm thereafter adjudicated a bankrupt, for services then and thereafter to be rendered the firm, does not constitute a preference.

2. Under Bankr. Act July 1, 1898, c. 541, § 60, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445], providing that a payment made to an attorney by a debtor in contemplation of bankruptcy may be examined by the court, and is valid only to the extent that the payment is reasonable, such examination is within the exclusive jurisdiction of the federal court.

3. In an action by a trustee in bankruptcy to recover an alleged preference, it cannot be presumed that the debtor was insolvent, at the time the preference was made, from the fact that the debtor subsequently made an assignment and was thereupon declared a bankrupt.

4. Evidence reviewed, and held insufficient to show that a bankrupt was insolvent at the time an alleged preference was made, or that the preferred creditor had knowledge at the time that the debtor was in failing circumstances.

5. Under Bankr. Act. July 1, 1898, c. 541, § 57, 30 Stat. 560, 561 [U. S. Comp. St. 1901, p. 3444], requiring claims to be exhibited within one year after adjudication, and requiring a creditor who has received a preference to surrender the same as a condition precedent to his right to prove his claim, where a bankrupt's trustee failed to take steps to avoid a preference a sufficient length of time before the expiration of the year to afford the preferred creditor a reasonable time in which to surrender the preference and exhibit his claim against the estate, the trustee's action to avoid such preference was barred by laches.

Appeal from St. Louis Circuit Court; H. D. Wood, Judge.

Action by Solomon L. Swartz against Nathan Frank. From a judgment in favor of defendant, plaintiff appeals. Affirmed.

Abbott & Edwards, for appellant. Richard A. Jones and David W. Voyles, for respondent.

MARSHALL, J.

This is a bill in equity to recover $5,100 alleged to have been paid to the defendant by the Siegel-Hillman Dry Goods company as a preference. The suit is brought, under the bankrupt act of 1898, by Swartz, the trustee in bankruptcy of said company. The trial court dismissed the bill on the ground that the insolvency of the Siegel-Hillman Dry Goods Company had not been shown within the meaning of the bankrupt act, and the plaintiff appealed. As this is a proceeding in equity, and as no instructions were asked or given, the facts and the law will be considered together.

1. The Siegel-Hillman Dry Goods Company ran a large department store in St. Louis. The defendant was an attorney at law, and the company was one of his clients. On December 1, 1899, the company owed him $1,100 fees for services theretofore rendered to it. A few days thereafter the company sought his services on account of business troubles, and agreed to pay him $4,000 for services then rendered and thereafter to be rendered in connection therewith. The trouble was this: About the last of November, Asiel Putzel & Co., of New York, sent their account against the Siegel-Hillman Dry Goods Company to a St. Louis law firm for collection. The company paid it, but the New York firm, without waiting to hear from their St. Louis attorneys, began an attachment suit against the company in New York. This precipitated a rush of demands for payment by other creditors for claims due and not then due, and about $12,000 in such claims were placed in the hands of attorneys in St. Louis for collection. Negotiations were at once begun between Hillman, the president of the company, and the defendant, the attorney of the company, who also held some claims against the company for collection, on the one side, and the attorneys who held the claims aforesaid on the other side, which resulted in an agreement that the company would pay one-third of such claims on December 13th, one-third on December 20th, and one-third on December 27th, and that other claims should not be paid until afterwards. The first payment was promptly made. The defendant was demanding cash for his services, and the company was pleading that it needed all its ready money. Accordingly, on December 19th, the company assigned to the defendant open accounts held by it against its customers to an amount aggregating $5,107.14, which the defendant thereafter collected, with the exception of about 2 per cent. thereof. The second payment was not met on the day agreed upon, but after banking hours on December 23d the company sent checks therefor to the said attorneys. The 24th of December, 1899, fell on Sunday, and the 25th was Christmas. On December 26th the company executed a deed of trust upon its stock of goods, etc., to Thomas McKittrick, for $223,888.12, as trustee for the Fourth National Bank of St. Louis and 377 other creditors. On December 30, 1899, an involuntary petition in bankruptcy was filed against the company. Some time during the first 10 days of January, 1900, the trustee, McKittrick, sold the stock of goods, store fixtures, etc., covered by said deed of trust, for about $70,000. On February 6, 1900, the company was adjudged a bankrupt, and on March 10th the plaintiff was elected and qualified as trustee in bankruptcy of said estate. This suit was begun about 16 months after the adjudication aforesaid.

There is no question that the $4,000 fee agreed upon in the early part of December, 1899, was for services then and thereafter to be rendered in respect to the business troubles of the company, and therefore does not fall within the prohibition against preferences of the federal statute. Bankr. Act July 1, 1898, c. 541, § 60, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445]. This section provides that, if a debtor in contemplation of bankruptcy pays money or transfers property to an attorney for services, the transaction may be re-examined by the court upon the petition of the trustee or of a creditor, and only the amount held by the court to be a reasonable amount shall be deemed valid, and the excess may be recovered by the trustee. This provision of the bankrupt law underwent review by the Supreme Court of Pennsylvania in Fourth v. Stahl, 10 Am. Bankr. R. 442, 55 Atl. 29, and it was held that, where the money or goods were given in consideration of services presently rendered or thereafter to be rendered, such act was not within the mischief the bankrupt act was aimed against, and was valid, but that the bankrupt court could review the transaction, and, if the amount was found to be excessive, the excess could be recovered by the trustee. In Bank v. Bruce (C. C. A.) 109 Fed. 69, it was held that where a mortgage was given as security partly "for a present consideration" and partly for an antecedent debt, which was void as to creditors, it was valid as to the first, and voidable as a preference as to the latter only. The same conclusion was reached in Re Wolf (D. C.) 98 Fed. 84. The $4,000 fee for services presently and thereafter to be rendered was therefore a valid preference under the bankrupt law. It is plain that if this were not so, no person in failing circumstances could secure the advice and services of an attorney. No attempt is shown to have the federal court review the amount so paid, and the state courts have no jurisdiction to do so. They can only enforce a recovery where the preference is unlawful. In fact, this is not an action to recover the excess over a reasonable amount, but is an action to recover the whole amount as a fraudulent preference under the bankrupt act.

This leaves for consideration only the question as to the $1,100 due for services previously rendered. Under the bankrupt law (section 60) a person is deemed to have given a preference if, being insolvent, he procures or suffers a judgment to be entered against him, or if he makes a transfer of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. And it is further provided by the act that "if a bankrupt shall have given a preference within four months before the filing of the petition, or after the filing of the petition and before the adjudication, and the person receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a...