216 F. 208 | D. Me. | 1914
This case comes before the court upon the petition of William W. Butterfield to set aside the finding of the referee in bankruptcy, upon the allowance of claims in which the petitioner holds the only beneficial interest. The proofs of debt embrace the following items:
Cross, Yiuiderwoi'p, Foote & Ross, as trustees for William W. Butterfield, $88,000, with 6 per cent, interest coupons.
William W. Butterfield, assignee of National Lumberman’s Bank, holding also Astor Trust Company bonds as security, $12,000, $10,450.40, with interest.
Mary Ifi. McCracken, holding also $10,000 Astor Trust Company bonds as security $9,000, with interest.
Hackiey National Bank, holding also $10,000 Astor Trust Company- bonds as security, $10,000, with interest.
George Boyce, $1,000, with interest.
Old National Bank, $3,000, with interest.
Two general classes of claims are presented by the record. The first class consists of:
(a) The claim appearing in the proof as represented by Cross and others, trustees, amounting to $88,000.
(b) The claim of Mary E. McCracken upon $10,000 of bonds of the
The second class consists of the claim of the petitioner, Mr. Butter-field, by virtue of the assignment of certain notes given Mary E. Mc-Cracken, the National Lumberman’s Bank, the Hackley National Bank, George Boyce, and the Old National Bank, amounting in all, upon their face, without interest, to $39,000. This second class of claims is for a dividend out of the general assets of the estate in bankruptcy, upon the total amount of the claims, without interest, after the application thereto of the pro rata share, out of the assets covered by whatever lien is found to exist upon the bonds.
1. At the threshold of the proceedings, however, the petitioner makes the contention that the trustee in bankruptcy is not a proper party in this proceeding, and should not be allowed to appear in court and object to the claims offered for proof; that, inasmuch as, by its terms, the Astor Trust mortgage covers all the property of the bankrupt estate, therefore the trustee in bankruptcy has no interest whatever in any of the issues involved in these proceedings, and has no right to appear in court and object to any of the claims offered for proof, he being a representative of the unsecured creditors only; and, it appearing that all the property of the estate will be insufficient to pay the trust mortgage in full, there can in no event be anything for the general creditors.
The record shows that, although the original Astor Trust Company mortgage purports to cover all the property of the National Boat & Engine Company, a serious controversy arose between the trustee under the mortgage and the trustee in bankruptcy. The question presented, as stated by counsel, was whether the Astor Trust Company mortgage legally covered and included certain of the personal property, by reason of a failure to record the mortgage as to such personal property, and by reason also of inability to show that any of the after-acquired property was purchased with the proceeds of the„mortgage, and for certain other reasons. This controversy came before this court; it appearing that the claim of the invalidity of the mortgage had some foundation, the court sustained the ruling of the referee to the effect'that the referee had the right, under the circumstances of the case, to order a sale of the property free from the alleged lien of the Astor Trust Company mortgage.
In the course of the trial of the cause, a matter of some significance has been brought to the attention of the court. The trustee was authorized to sell, and did sell, a part of the assets of the National Boat & Engine Company to a certain reorganization committee for the sum of $250,000; this sale was authorized by the court. The terms of the offer for the purchase of the.property are before the court. It appears that a certain portion of the purchase money was paid down,
“If, in tlie exercise of its customary jurisdiction, tlie Bankrupt Court obtained a lawful custody of tbe res to which, the liens related, or of a fund realized from its sale, then the duty which was thereby devolved upon it of distributing the fund among those to whom it rightfully belonged did empower it to determine the relative priorities of the conflicting claims to the fund.” The claimant relies on Dudley v. Easton, 104 U. S. 99, 26 L. Ed. 668.
In that case the claimants did not come into the Bankruptcy Court, and did not prove their claims; the Supreme'Court said that they could not be drawn into court against 'their will. In the case before me, the claimant has already proved his claim, and presented himself in court, seeking a dividend out of the fund in its custody. The court has control of the fund to which the liens relate, and jurisdiction to distribute it. As a consequence the court must determine the rightful priority of the conflicting claims, and adjudge whether the claimant has a valid claim to a dividend out of the fund. It is the duty of the trustee to appear and protect the fund in the custody of the court.
With regard to the recording of the deed, the following testimony of Mr. Butterfield is before me:
“Q. Mr. Butterfield, was that mortgage deed coloring all the real estate and property and business ot this Racine Boat Manufacturing Com]-.any ever recorded? A. No, sir.
*‘Q. Why not? A. It was given with that understanding it was not to be recorded except any loss resulted — if I thought the company was on their last legs or about to fail — and then 1 was to use my own discretion whether to record it then or not.
“Q. And why wasn’t it recorded? A. Wo'thought by recording it it would affect the credit of the company.
"Q. In what way, how-? A. It would become puMiely known, the conditions set forth in that trust deed, which would naturally affect the credit of the company.
“Q. Publicly known to the creditors of the company? A. Creditors and bondholders.
“Q. And you say this was the understanding — the understanding with whom? A. With Mr. Reynolds and the officers of the company, with myself and others interested, Mr. Reynolds, Mr. Ross, and Mr. McCracken.
“Q. So pursuant to that understanding, it was intentionally not recorded? A. Yes.
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“Q. And -what was done in not recording was done with the knowledge of all the other directors of the Racine Boat Manufacturing Company? A. Yes, sir.”
It is the doctrine of the Supreme Court that where, by collusion of the mortgagor, the mortgagee withholds a mortgage from record for the purpose of giving the mortgagor a fictitious credit, and inducing others to give him credit, and the mortgagor fails and is unable to pay the debts thus contracted, the mortgage is fraudulent at common law. Blennerhasset v. Sherman, 105 U. S. 100, 26 L. Ed. 1080. Such a mortgage is held void at common law, whether the motive of the mortgagee be gain to himself, or advantage to the mortgagor. It is held that such a mortgage will not be made valid by the fact that it was supported by a sufficient consideration, and that a deed, not at first fraudulent, may afterwards become so by being concealed, or by not being produced, if thereby creditors are induced to loan money. Hungerford v. Earl, 2 Vern. 261; Clayton v. Exchange Bank, 121 Fed. 630, 634, 57 C. C. A. 656; Davis v. Schwartz, 155 U. S. 631, 15 Sup. Ct. 237, 39 L. Ed. 289; Blennerhasset v. Sherman, supra, 105 U. S. 100, 26 L. Ed. 1080. In Sawyer v. Turpin, 91 U. S. 114, 23 L. Ed. 235, the Supreme Court held that the evidence did not justify the assertion that there was any agreement that the bill of sale should not be recorded, or that possession should not be taken under it. Wherever such agreement is shown, the Supreme Court has held it sufficient to render a deed void at common law. In the Perkins Case (D. C.) 155 Fed. 237, this court held from the facts disclosed that the nonrecording of a “conditional sales contract” was not a mere matter of omission, but was in pursuance of a distinct plan that there should be no record; and the court held the sale invalid. In the Shaw Case (D. C.) 146 Fed. 273, this court held a mortgage void for the reason that it was fraudulently withheld from record; there being a distinct and affirmative understanding that the mortgage was not to be recorded. Certain statutes and decisions
In Fourth Nat. Bank v. Willingham, 213 Fed. 219, just decided by the Circuit Court of Appeals for the Fifth Circuit, the court sustained the contention of the trustee in bankruptcy that a certain mortgage was “withheld from record to bolster the credit of the mortgagor,” and held that the mortgage was fraudulent and void because of the agreement between the parties that it should be withheld from record for such purpose. The court affirmed the decision of the court below on the authority of Clayton v. Exchange Bank, 121 Fed. 630, 57 C. C. A. 656, and. of The Duggan Case, 183 Fed. 405, 106 C. C. A. 51. In both the cases last cited, the agreement to withhold the mortgage from record was only a tacit agreement.
In the case at bar, this agreement was distinct, open, and unquestioned. It is brought before the comt by the testimony of the claimant. The case shows an intentional nonrecording of the trust deed for the distinct purpose of avoiding publicity, and to avoid injury to the credit of the company. The deed of the Racine Company to the National Company contained a warranty against all incumbrances, and made no mention of the existence of the Racine mortgage. The whole testimony shows a secret scheme and conspiracy to substitute bonds for the trust deed; that the conspiracy was entered into between the claimant, Butterfield, and certain other directors, with the evident purpose of concealing its existence from other members of the board of directors of the National Boat & Engine Company. I am forced to the conclusion that the trust deed of the Racine Company was fraudulent and void, and forms no basis for a valid transfer of the $88,000 par value of the bonds. The learned counsel for claimant contends that, outside the sux-render of the trust deed, there was other consideration for the deposit of the $88,000 of bonds. lie urges that there was an agreement by the claimant to renew his indorsements, and that there were further considerations. I find that under the circumstances of the case there was no other good and sufficient consideration for the transfer of the bonds, which would make such transfer valid as against the trustee in bankruptcy. And I further find that the transfer of the $88,-000 of bonds was invalid as against said trustee, for the reason that the same was a preference voidable by the trustee, both under the general principles of equity and the express provisions of section 60b of the Bankruptcy Act, as amended.
There is a stipulation that these bonds for $32,000 were delivered by the officers of the National Boat & Engine Company as collateral security for the debts of Mrs. McCracken and the two banks. The trustee contends that the transfer of these bonds was without consideration; that they were deposited with the banks and with Mrs. McCracken as additional security on antecedent debts, namely, upon the original notes on which Butterfield was liable as indorser; that they were deposited, not for the purpose of furnishing additional capital to the company, or to assist in the purchase of manufacturing products; that their transfer was without authority, and in fraud of the rights of stockholders.
The proofs show that the bonds were delivered to creditors of the Racine Boat Manufacturing Company more than six months before the bankruptcy of the National Boat & Engine Company, in order to give security to those creditors. If the physical possession of the pledge had been left with the debtor, the burden of proof would have been upon the trustee in bankruptcy. Barr v. Reitz, 53 Pa. 256; Taney v. Penn. Bank, 232 U. S. 174, 181, 34 Sup. Ct. 288, 58 L. Ed. 558. But here the transaction was completed. The creditors have not received the protection from the bonds to which they are entitled. No action is shown in behalf of the National Boat & Engine Company to limit its obligations in so transferring bonds for the protection of the creditors of the old company, whose property had been absorbed by the National Boat & Engine Company. I think Mary E. McCracken, the National Lumberman’s Bank, and the Hackley National Bank are entitled to the security of the $32,000 of bonds of the National Boat & Engine Company. The testimony fails to satisfy me that the pledging of the bonds was for any fraudulent purpose. I sustain the claim of the petitioner. I give him the benefit of the security of these bonds to a dividend out of the proceeds of the assets covered by the lien of the Astor Trust Company mortgage.
In reference to the two claims which I have so far considered, I sustain the finding of the referee in disallowing the claim for the proceeds of the $88,000 evidenced by the first mortgage bonds of the bankrupt company. I reverse the decision of the referee in disallowing the claim of Mary E. McCracken and others upon the $32,000 of bonds of the National Boat & Engine Company, and hold that this claim may be allowed for a dividend out of the proceeds of the assets covered by the lien of the Astor trust mortgage.
First. The sum of $1,543.50, paid to the Lumberman’s National Bank on June 26, 1911, within four months prior to the filing of the petition in bankruptcy, upon a note on which Butterfield was liable as indorser, and thereby benefited.
Second. The payment of the sum of $1,000 to the Old National Bank, within the four months’ period, upon a note which had been guaranteed in writing by the claimant Butterfield, and who was thus benefited thereby.
Third. Hie payment of the sum of $1,000 by the bankrupt directly to the claimant Butterfield, in May or June, 1911, and within the four months’ period, to reimburse the claimant for a prior loan of that sum to defray the pay roll of the company.
The determination of whether or not the above payments constitute preferences under the Bankruptcy Act becomes material to the issues here involved; since it is claimed by the learned counsel for trustee that, if these payments are found to constitute preferences under section 60b of the Bankruptcy Act, this would constitute a ground for refusing to allow any claim which might otherwise be allowed, until such preferences shall have been surrendered by the claimant.
Upon .examination of the evidence, I find that the above payments were voidable preferences under section 60b of the Bankruptcy Act. I sustain the ruling of the referee as to the same.
In reference to the question of not allowing any of the claims in question, we are met by section 57g of the Bankruptcy Act:
“The claims of creditors who have received preferences, voidable under section sixty, subdivision ‘b,’ or to whom conveyances, transfers, assignments, or incumbrances, vokl or voidable under section sixty-seven, subdivision ‘e,’ have been made or given, shall not be allowed unless such creditor shall surrender such preferences, conveyances, transfers, assignments, or incumbrances.”
In relation to this section, it is clear that, as the law now stands, no claim is allowable where the claimant has received any advantage over his co-claimants by means of a preference which is voidable under section 60b, or by means of a conveyance, transfer, assignment, or incum-brance which is void or voidable under section 67e. Collier on Bankruptcy (9th Ed.) page 731; Stevens v. Nave-McCord Mercantile Co., 150 Fed. 71, 80 C. C. A. 25. Having this provision of law in mind, I order that the claims of Mary E. McCracken, the National Lumberman’s Bank, and the Hackley National Bank, in which the claimant Butterfield has the only beneficial interest, shall finally have the benefit of the $32,000 of the bonds of the National Boat & Engine Company, in pursuance of what I have already said in this opinion; but, according to the law which I have just cited, these claims, either upon the $32,000 bonds deposited as collateral, or upon the original notes,
The claims ‘of Mary E. McCracken, National Eumberman’s Bank, and Hackley National Bank, upon the original notes offered for proof and assigned to Butterfield for which the $32,000 par value of bonds are held as security, and also the claims of George Boyce and of the Old National Bank upon the original notes assigned by them to But-terfield and offered for proof, on which no bonds were held as security, are valid claims which should otherwise be allowed, but'in face of the provisions of section 57g of the Bankruptcy Act are not allowable at the present time, and cannot be allowed until such preferential payments shall have been surrendered, as I have pointed out in this opinion.
The claimant recovers costs. Eet a decree consistent with this opinion be presented in court on or before September 19, 1914; corrections to be presented not later than September 26, 1914; decree to be settled September 29, 1914.