Williams v. Twin City Company, 15201.

• Decision Date: 06 January 1958
• Docket Number: No. 15201.,15201.
• Citation: 251 F.2d 678
• Parties: Ralph E. WILLIAMS, as Trustee in Bankruptcy of the Estate of George F. Elliff, an individual doing business as Pine Supply Co., bankrupt, and Pearl K. Lannin, Appellants, v. TWIN CITY COMPANY, Twin City Lumber Co., John W. Hunter, Franklin Supply Corporation, Southwest Management Corp., H. A. Collins, and William R. Ramsay, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

251 F.2d 678 (1958)

Ralph E. WILLIAMS, as Trustee in Bankruptcy of the Estate of George F. Elliff, an individual doing business as Pine Supply Co., bankrupt, and Pearl K. Lannin, Appellants, v. TWIN CITY COMPANY, Twin City Lumber Co., John W. Hunter, Franklin Supply Corporation, Southwest Management Corp., H. A. Collins, and William R. Ramsay, Appellees.

No. 15201.

United States Court of Appeals Ninth Circuit.

January 6, 1958.

Robert N. Jacobs, C. Huntington Jacobs, Daniel R. Cowans, San Jose, Cal., for appellants.

Shapro & Rothschild, Daniel Aronson, Jr., San Francisco, Cal., for appellees.

Before HEALY, CHAMBERS and BARNES, Circuit Judges.

BARNES, Circuit Judge.

This is an appeal from a judgment for defendants on three counts of a four count complaint by which the trustee in bankruptcy sought to set aside a note and trust agreement of the debtor as a fraud on creditors under 11 U.S.C.A. § 107 sub. d, to recover certain payments as preferences, and to recover damages. The district court found for the trustee on certain payments as a preference (count three), but refused to set aside other payments on the ground the defendants were secured creditors within the meaning of 11 U.S.C.A. § 1(28). The court also refused to set aside the transaction attacked, finding "that neither the Promissory Note nor the Trust Agreement * * * were nor are fraudulent as against the creditors¹ of * * Elliff * * * under Section 67(d) (11 U.S.C.A. § 107(d)) of the Bankruptcy Act or under any other applicable statute of the State of California."²

Elliff, the debtor, was engaged in the retail lumber business in San Jose. In May, 1953, Elliff's stock in trade was warehoused and the defendants, who had sold the stock in trade to Elliff, were given warehouse receipts as security for debts then owed them. This "May Agreement"³ by which defendants controlled Elliff's stock was terminable at will by either party. Shortly thereafter, upon further default and receipt by defendants of worthless checks from Elliff, the defendants terminated the "May Agreement" and informed Elliff that new arrangements would have to be made or he would be closed down. The "October transaction" here attacked resulted. By this agreement, Elliff transferred all his stock and present and future accounts receivable to a trustee, with Pearl Lannin, Elliff's mother-in-law, as beneficiary. Elliff executed a note for the amount owed defendants ($28,000), which note was guaranteed by Mrs. Lannin. In return for this guaranteed note defendants transferred their warehouse receipts to Mrs. Lannin, whereby she secured her guarantee. The trust agreement provided for Elliff's utilization of the income in his business, but required that 20% of all income be set aside for payment to defendants on their note. Elliff insisted that the note and trust agreement be kept secret so as to prevent panic among his other creditors. Apparently defendants' representative was aware of this wish of the debtor, but did not participate in that decision. The evidence indicates and the trial court apparently found that Mrs. Lannin knew nothing of the details of the transaction and believed she was merely lending, by her guarantee, a large sum to her son-in-law for use in his business.

Elliff subsequently made some payments on the note, which were allowed by the court below to stand; and some payments on a later "open account" which were set aside by the court below as preferences. In July, 1954, Elliff went into bankruptcy on petition of other creditors.

In summary bankruptcy proceedings against Mrs. Lannin, to which defendants were originally named, but from which they were dismissed on jurisdictional grounds, the note and trust agreement were declared null and void as against the trustee in bankruptcy, and it was determined that Mrs. Lannin had no interest in the stock in trade or accounts receivable of Elliff. The proceeding in the court below sought the same determination against defendants for the purpose of avoiding the note.

Mrs. Lannin cross-complained against defendants for damages but was denied recovery. She has appealed. What is here said concerning the companion appeal is dispositive of hers.

The trustee, in Count IV of the complaint, claimed damages. This was denied and was specified as error on appeal. No argument is made relative to this claim in the briefs.

In essence, it is appellants' position that the device used here is merely another ingenious method devised by a debtor to forestall financial disaster; and that such is "fraudulent" in the bankruptcy, as distinguished from the criminal, sense; and therefore barred by 11 U.S.C.A. § 107, sub. d.

Although the attack by appellants in their brief is on the note, it is actually premised on the "fraudulent transaction" of which the note is but a part, i. e., that there was a single transaction, and even though the note be valid, it should be set aside as an integral part of the entire fraudulent transaction.⁴

The essence of this transaction was the transfer of existing assets to the trust, and the obligation Elliff incurred to transfer future accounts receivable to the trust. 11 U.S.C.A. § 1(30) defines a transfer to include indirect dispositions and certainly a transfer in trust so qualifies.

We should first note that 11 U.S. C.A. § 107, sub. d(2) defining what constitutes a fraudulent transfer and to whom it is fraudulent when...