Wrenn v. Citizens Nat. Bank

• Decision Date: 01 June 1921
• Citation: 114 A. 120,96 Conn. 374
• Parties: WRENN v. CITIZENS' NAT. BANK.
• Court: Connecticut Supreme Court

114 A. 120

96 Conn. 374

WRENN v. CITIZENS' NAT. BANK.

Supreme Court of Errors of Connecticut.

June 1, 1921

Appeal from Superior Court, New Haven County; John P. Kellogg Judge.

Action by Maurice P. Wrenn, trustee in bankruptcy, against the Citizens' National Bank to recover the amount of two promissory notes made by the bankrupt, payable to the defendant, and alleged to have been paid by the bankrupt to the defendant as a preference in violation of the Bankruptcy Act, brought to the superior court, where the plaintiff was nonsuited in a trial to the jury, and from the refusal to set aside this judgment the plaintiff appealed. No error.

James A. Peasley, of Waterbury, for appellant.

Lawrence L. Lewis, of Waterbury, for appellee.

BURPEE, J.

The plaintiff's evidence, considered most favorably to him showed that Martin W. Brown, the bankrupt, began to carry on business in Waterbury in June, 1919, and opened a checking account in the defendant bank, which he continued in the course of his business as a good account. On December 5, 1919, he made a promissory note for $500 payable to the defendant one month after date, which was discounted by the defendant and the proceeds added to his account. On December 15, 1919, he made another note for $500 payable to the defendant two months after date, which was used in the same manner. About December 23, 1919, an examination of his books and sales accounts was made by some of his creditors, which showed that he was doing a good and profitable business, and this result was communicated to the defendant. On December 31, 1919, Brown went to New York to raise more money to enlarge his business, and asked an officer of the defendant bank, who was a personal friend, to deposit in his account in the defendant bank any checks payable to him that should come to his office during his absence, saying that he expected to be gone about five days. Brown fell sick in New York and was unable to return to Waterbury until about February 1st. As requested, his friend deposited checks in Brown's bank account amounting to $1,930.84 before January 10, 1920. On January 5, 1920, the first of the notes given by Brown to the defendant became due, but there were not then sufficient funds in his bank account to pay it. The defendant held the note until January 7, 1920, and then charged it to Brown's account. About this time the defendant's officer who had charge of discounted notes became alarmed by Brown's absence and apparent neglect of his business and caused a request to be sent to Brown to take up his second note. Consequently Brown sent his check, and the defendant applied it in payment of that note on January 10, 1920. This transaction left a balance of more than $200 to Brown's credit, and before January 21, 1920, further deposits were made amounting to about $500. On February 9, 1920, on his voluntary petition, Brown was adjudicated a bankrupt. His assets will enable the trustee to pay not more than 25 per cent. of his liabilities.

The plaintiff claims that the conduct of the defendant in thus using the bankrupt's bank deposits worked a preference in favor of the defendant, which was voidable by the trustee under subdivision " b" of section 60 of the United States Bankruptcy Law of 1898 (30 U.S. Stats. at Large, 562), as amended by Act Feb. 5, 1903 (32 U.S. Stats. at Large, 799), and the subsequent amendment of 1910 (Comp. St. § 9644). The controlling provision of the Bankruptcy Law is section 60, the material part of which as amended June 25, 1910, is:

" a. A person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition *** made a transfer of any of his property, and the effect of the enforcement of such *** 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. ***

b. If a bankrupt shall have *** made a transfer of any of his property, and if, at the time of the transfer *** being within four months before the filing of the petition in bankruptcy *** the bankrupt be insolvent and the *** transfer then operate as a preference, and the person receiving it, *** shall then have reasonable cause to believe that the enforcement of such *** transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value from such person."

We think the evidence, tested by these provisions, does not support the plaintiff's claim.

It appears that each of these transactions made a transfer of Brown's property, that they were made within four months of the filing of his petition in bankruptcy, and that the effect of each transfer was to enable the defendant creditor to obtain a greater percentage of its debt than any other creditor of the same class. But the Bankruptcy Law requires as the condition for recovery by the trustee in an action of this kind against the preferred creditor that he shall prove two other distinct facts: First, the insolvency of the bankrupt at the time of the transfer; and, second, that the person receiving the preference " shall then have reasonable cause to believe that *** the transfer would effect a preference." In this action, then, the plaintiff had the burden of proving that Brown was insolvent on January 7, 1920, or January 10, 1920. We think he failed to sustain it.

It was shown that Brown was doing a profitable business in December, 1919, and keeping a good bank account with the defendant, which was increased by deposits of nearly $2,000 before January 10, 1920. The fact that on January 5, 1920, there was not on hand a balance sufficient to pay the first note when it became due is not proof that Brown was then insolvent. By means of his incoming assets in the course of his business his account became more than large enough to meet the drafts made upon it on January 7 and 10, 1920. His insolvency on February 9, 1920, does not prove that he was insolvent a month before.

But if the plaintiff had proved that Brown was insolvent in fact on January 7, 1920, when the first note matured, it does not follow that the transfer is voidable. The bank was the owner of Brown's overdue note for $500, and was therefore his creditor on that day. At the same time it was also his debtor to the amount of his deposits on that day. These were mutual debts and subject to be set off against each other under the commercial laws of the states, which are recognized and after bankruptcy enforced by section 68 of the Bankruptcy Act, whenever the preferred creditor had no reasonable cause to believe that the enforcement would effect a preference. Section 60b. We find nothing in the evidence in this case to indicate that this defendant had reasonable cause to believe that this application of Brown's deposits would effect a preference, or that it was made for the purpose of enabling the defendant to secure a preference by exercising its right of set-off. There must be something more than suspicion.

" It is not enough that a creditor has some cause to suspect the insolvency of his debtor; but he must have such a knowledge of facts as to induce a reasonable belief of his debtor's insolvency, in order to invalidate a security taken for his debt. To make mere suspicion a ground of nullity in such a case would render the business transactions of the community altogether too insecure. It was never the intention of the framers of the act to establish any such rule. A man may have many grounds of suspicion that his debtor is in failing circumstances, and yet have no cause for a well grounded belief of the fact. He may be unwilling to trust him...