Walker v. Wilkinson
| Decision Date | 16 February 1924 |
| Docket Number | 4165. |
| Citation | 296 F. 850 |
| Parties | WALKER v. WILKINSON. |
| Court | U.S. Court of Appeals — Fifth Circuit |
W. E Spell, of Waco, Tex., J. A. Templeton and Clay Cooke, both of Fort Worth, Tex., and G. A. Stultz, of Wichita, Kan., for plaintiff in error.
Stanley Boykin, H. C. Ray, and Geo. M. Conner, all of Fort Worth Tex. (George M. Conner, Capps, Cantey, Hanger & Short, and Boykin & Ray, all of Fort Worth, Tex., and Orestes Mitchell of St. Joseph, Mo., on the brief), for defendant in error.
Before WALKER and BRYAN, Circuit Judges, and GRUBB, District Judge.
The defendant in error was the duly appointed and qualified trustee in bankruptcy of the Walker Grain Company, and in that capacity instituted this suit at law in the District Court of the United States for the Northern District of Texas, to recover from the plaintiff in error certain voidable preferential payments. The alleged preferences were based upon the payment within four months of bankruptcy of two notes, aggregating $85,000, executed by the bankrupt to the American Exchange National Bank of Fort Worth, the payment of which was alleged to have been guaranteed by the plaintiff in error. The plaintiff in error was the president and principal stockholder of the bankrupt, and it was charged that he procured the payments to be made by the bankrupt, in order to relieve his liability upon the guaranty, while the bankrupt was insolvent, and when he had reasonable grounds for believing it to have been insolvent. The trial was had before the District Judge and a jury, and resulted in a verdict in favor of the defendant in error for $56,484.65 with interest from the date of suit. Both parties sued out writs of error to this judgment. In view of the conclusion reached by us, it is unnecessary for us to consider the cross-assignments of error, and but one of the 43 errors assigned upon the direct writ of error.
The ninth assignment of error upon the original writ of error is based upon an exception taken by the plaintiff in error to the oral charge of the District Judge, because it failed to submit to the jury as an issue the claim of the plaintiff in error to an offset, pleaded in his answer, in the sum of $32,500, the amount of two loans made by the plaintiff in error to the bankrupt, one of $30,000, April 24, 1918, and one of $2,500, on July 6, 1918. Whether the issue of offset should have been submitted to the jury depends upon how the offset affected the question and extent of the preference claimed to have been received by the plaintiff in error through the payments of the bankrupt's notes to the bank out of his assets.
To establish a recoverable preference the trustee must show (1) a transfer of property or money to the creditor by the bankrupt, (2) while the bankrupt was insolvent and within four months of bankruptcy; (3) that the creditor had reasonable grounds for believing the bankrupt insolvent at the time he received the transfer; and (4) that the effect of the transfer was to give the creditor a greater percentage of his debt than other creditors of the same class secured.
The purpose of the law of preferences is to secure an equal distribution of the bankrupt's assets among his creditors of like class. If a transaction, in its entirety, does not interfere with this purpose of the law, it does not constitute a voidable preference. The fact that one creditor is paid in full from a source, to which other creditors have no right to resort, does not entitle other creditors to complain or the trustee to recover the amount so received. The transfer or payment must be one that diminishes the fund to which creditors of the same class can legally resort for the payment of their debts, and to an extent that makes it impossible for such other creditors to obtain as great a percentage as the favored one, in order that the transaction constitute a preference.
It has been decided that, in an action by a trustee to recover money paid a creditor by way of preference, the creditor cannot set off against his liability for the return of the preferential payments the original debt on which the payments were applied. Rotan Grocery Co. v. West, 246 F. 685, 158 C.C.A. 641; Mechanics' Bank v. Ernst, 231 U.S. 60, 34 Sup.Ct. 22, 58 L.Ed. 121. The reason is, to permit this to be done would defeat the right to recover the preference and render the statute futile. In such a case the transaction is single, and results in a depletion of the fund that would otherwise have gone to creditors to the extent of the preferential payments. Allowing the creditor to set off the debt due him against the payments received by him would leave the preference unremedied. In this class of cases, the right to offset is denied, because the estate has been depleted to the detriment of creditors of like class, and to allow the right of set-off would perpetuate the depletion.
There is a class of cases in which the statute itself allows an offset against the recovery of the preference. Section 60c of the Bankruptcy Act (Comp. St. Sec. 9644) authorizes the creditor to set off against the recovery of preferential payments any new credit thereafter extended in good faith by the preferred creditor without security, and for property which becomes part of the debtor's estate and remains unpaid at the date of adjudication. The reason for the provision is that the debtor's estate is enriched by the receipt of the property for which the new credit was extended, and the fund for distribution among creditors is impaired only to the extent of the difference between the value of the preference received and the value of the property afterwards sold the debtor for the new credit. This is in line with the purpose of the law to require the preferred creditor to surrender only the net amount of the benefit he received in excess of that received by other creditors of his own class.
The right of offset as against the recovery of a preference given by section 60c is not exclusive. In any case in which the result of allowing the offset does not disturb, but promotes equality of distribution among creditors of...
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