199 F. 704 | 7th Cir. | 1912
(after stating the facts as above). The appellant bank is successor in interest and liability to the Federal Trust & Savings Bank, original defendant named in the bill filed by appellee, as trustee in bankruptcy, to recover the amount of alleged unlawful preferences obtained from the bankrupt, Earl H. Prince; and this appeal is from a decree which approves the master’s report therein and awards such recovery upon two transactions, namely: One of $575.79, as a balance of certain deposits made by the bankrupt under special arrangement with the bank, between February 10th and 14th, appropriated by the bank immediately prior to the bankruptcy proceedings, and the other amounting to $4,250 for so-called “margin certificates” theretofore issued by the bank for special deposits made by the bankrupt, which were obtained and appropriated by the bank on February 15th, the day on which the proceedings. in bankruptcy were instituted. Both amounts were applied by the bank as credits upon pre-existing indebtedness of the bankrupt under promissory notes. The circumstances attending these transactions, together with the facts from which the nature of each must be ascertained, are not only settled by the master’s findings of fact, but are undisputed.
Counsel for the appellant contends for reversal mainly, if not entirely, on this proposition in substance: That the various deposits by the bankrupt, out of which these appropriations arose, were made and carried in the common relation of debtor and creditor, and were thus subject to the right of set-off provided by section 68 of the Bankruptcy Act — as upheld and defined by the Supreme Court in N. Y. County Bank v. Massey, 192 U. S. 138, 141, 24 Sup. Ct. 199, 48 L. Ed. 380, and by this court in Re George M. Hill Co., 130 Fed. 315, 64 C. C. A. 561, 66 L. R. A. 68, so that both method and fact of appropriation by the bank become immaterial, either amount being enforceable in such relation, as against the trustee in bankruptcy.
These certificates were issued by the bank, in its representative capacity as a “Board of Trade Depositary,” under the rules of the Board of Trade and its undertakings as such depository. Eacli certificate in controversy was issued to Prince, the bankrupt, upon his deposit of the amount thereof (either in money or by his check accepted as cash), for the purpose specified in the certificate, namely, as pledge or security on his Board of Trade contract with a second party named therein. Each certifies the amount deposited to be payable on its return indorsed by both parties named therein, or “on the order of the president of the Board of Trade,” as provided by the Board rules “under which the above-named deposit has been made,” and each bears designation as “not negotiable or transferable,” and is signed by the cashier of the bank. The purpose of each further appears in evidence, in accord with the recitals and plainly within the understanding of all the parties. Each of the outstanding certificates so issued to the bankrupt was on deposit with the “Clearing House of the Board,” as required by the rules, evidencing the amount thus pledged with the bank as security for the trade therein mentioned, which had not been closed. Under this state of facts, we believe the deposits thus made and accepted at the bank were plainly so limited in their purpose, that the rule in reference to general deposits by a customer of the bank is without force therein; that each was received and certified by the bank, as depository of the fund thus pledged by the bankrupt for performance of his trade, creating no title thereto in the bank, nor other right than that of bailee or stakeholder, to hold for payment in conformity with the stated purpose. So the fact of deposit and holding thereunder vested no right in the bank to divert the fund from such purpose and apply it upon the bankrupt’s indebtedness.
The bank, however, secured possession of these certificates before making such application and the further contention is thereupon pressed that it is entitled to an allowance for their amount, either in that form or by way of set-off against the trustee, notwithstanding the circumstances under which they were acquired. Arrange-
These transactions establish, as we believe, an unlawful preference in favor of the bank, with Anderson & Co. serving as intermediary to that end. The various propositions advanced as to results which may have arisen through default in the bankrupt’s trades, in whole or in part, in the absence of such substitution, are beside the inquiry; nor is it material what may have been the estimate of net profit in the trades, nor what portions were profitable respectively. As the transfer was made and performance of the several trades assumed by the purchaser, release of the certificates to secure performance on the part of the bankrupt was plainly intended. Thereupon the bankrupt became entitled to them. Delivery of the certificates to the bank, therefore, consummated a transfer in violation of the Bankruptcy Act, for which recovery by the trustee is expressly provided. Thus their appropriation by the bank for credit upon the indebtedness of the bankrupt was unauthorized.
Is the bank, however, entitled to like benefit out of the transactions through set-off in its favor, as contended? We are of opinion that no such right exists under the terms and obvious purpose of section 68 of the act. The first clause (68a) cited in support thereof, provides only “for cases of mutual debts or mutual credits” between the estate and a creditor, wherein “the account shall be stated and one debt shall be set off against the other.” In our understanding of the authorities (as above stated), these special deposits and liabilities are not embraced in such provision for set-off. But, if it be assumed that the relation of debtor and creditor was created between the bank and the bankrupt at any stage, such relation must arise through the transaction which released the pledge, making the amount deposited payable to the bankrupt, whereby the bank (under the. assumption) becomes his debtor. Thus viewed, the claim of set-off must he rejected under the express limitations prescribed in clause “b” (2) of the section. Moreover, in Western Tie & Timber Co. v. Brown, 196 U. S. 502, 510, 25 Sup. Ct. 339, 49 L. Ed. 571,
i The transcript of testimony on the part of a witness (Wolf), received in evidence under objection, upon which error is assigned, does not enter into consideration for the purposes of the appeal, and tlie question raised as to its admissibility becomes immaterial.
■ The', decree of the District Court, therefore, is affirmed.