3 Nat. Bank. Reg. 602 | U.S. Circuit Court for the District of Eastern Michigan | 1870
Tonkin & Tre-wartha, of Eagle Harbor, in the upper peninsula of Michigan, being indebted to defendants, merchants of Detroit, for merchandise, and also on a claim transferred to them in favor of Allan Shelden & Co., amounting in' the aggregate to about twelve thousand dollars, on May 9, 1868, to secure the payment thereof, executed to the defendants a chattel mortgage on all or nearly all their personal property, including two stocks of goods at Eagle Harbor. To induce the giving of the mortgage, defendants extended time for payment, so that the first payment of eight hundred dollars would become due July first after the date of the mortgage, and a like sum monthly thereafter until the whole sum of twelve thousand dollars, with interest, should be paid. On July 15. the first installment not having been paid, defendants took possession of the mortgaged property, and a few days after sold the same at public vendue. On August 3, Tonkin & Trewartha filed a petition to be declared bankrupts, and were afterwards duly adjudged to be such. Their assignee, the complainant, files a bill against defendants to recover the value of the property taken and sold under said mortgage, alleging that the mortgage was made within four months before the petition in bankruptcy; that Tonkin & Trewartha, at the date of the mortgage, were insolvent; that it was made with a view to give a preference, and that defendants had reasonable cause to believe their debtors insolvent, and the transaction to be in fraud of the provisions of the bankrupt act. The giving of the mortgage, and the then insolvency of Tonkin & Trewartha, are admitted by the
The bill of complaint presents a case under the first provision of section 35,—viz: of a transfer with a view to give a. preference; —and it is urged by defendants’ counsel that .this provision is not within the operation of the third paragraph of the section, which declares: “And if such sale, assignment, transfer, or conveyance is not made in the usual and ordinary course of business of the debt- or, the fact shall be prima facie evidence of fraud.” The question is, what “sales, assignments, transfers, and conveyances” are referred to in the clause just read? It follows two provisions, the first of which declares that “any payment, pledge, assignment, transfer, or conveyance,” made within four months by the insolvent debtor, .“with a view to give a preference,” &e., shall be void; the second, that “any payment, sale, assignment, transfer,, conveyance, or oilier disposition,” within sis months by the insolvent debtor of his property, “with a view to prevent his property from coming to his assignee in bankruptcy,” &c., shall be void. It was said at the argument, the clause as to what shall be prima facie evidence of fraud, does not refer to the first provision; among other reasons, .because the word “pledge” is not in the fraud clause, and is in the first provision; and so the word “sale,” employed in the second provision but not in the first, is used in the third or fraud clause. The same reasoning would prevent the third paragraph from applying to either of the former provisions; for the word “payment,” employed in both of them, is not used in the fraud clause, and the words “other disposition,” employed in the second paragraph, are not in the third. The words “sale, assignment, transfer, or conveyance,” employed in the third paragraph, are of comprehensive import, and embrace almost every disposition of property, whether absolute or conditional. Both the antecedent paragraphs refer to and are designed to protect the property of the insolvent, and the clause as to fraud is also designed to the same end. All these provisions relate to the same subject or thing,—namely, the property,—and all three aim to protect property of insolvents from fraudulent disposals. My conclusion is in harmony with the rulings in the courts of bankruptcy so far as decisions have come under my notice, and with the opinion of the supreme court of Massachusetts in reference to a like provision in the insolvent laws of that state. When, therefore, it was shown in this case that Tonkin & Trewartha were insolvent, and gave a chattel mortgage of their goods to secure a debt which they owed, there was established a case of fraud prima facie—for that mode of transfer by a trader of his goods, is not one in the usual and ordinary course of his business, but is unusual and exceptional.
We are now to inquire whether the mortgage was made with a view to give a preference to defendants. Whether it was, rests upon the facts, and I refer to Trewartha’s testimony first He says: “I knew”—May 9, 1868, the date of the mortgage—“if we were called upon to pay all our indebtedness at the time, it would be impossible to do so; our only hope was to continue in business, and by using profits yet to be made, we might pay our debts. Next, Mr. Tonkin testifies: “In March, 1868, on reviewing the state of my business, I felt that if demands were pressed upon me for all the debts I owed, I should fall far short of paying them.” And they say they were averse to giving a mortgage to defendants; they did so only when pressed, and becoming satisfied it was their only way to ward off the blow which threatened their business. Mr. Maynard went from Detroit to Eagle Harbor in May, and obtained from Tonkin & Tre-wartha the mortgage on their goods, as the agent and attorney of defendants. He testifies: “Trewartha said he did not see why we wanted securities, as he had given me a full statement of their standing, and that we could see that they had a surplus of between twelve and thirteen thousand dollars. I said to him that in ease security was given, I should be willing to fix the time and amount of payments to be made to suit their convenience.” He then states that Tonkin “expressed some dislike to giving a chattel mortgage,” and “wanted to know if they could rely upon the defendants giving them additional credit in case they should execute the mortgage. I informed them they could.” Now it turns out that the statement which Tonkin & Trewartha made of their standing to Mr. Maynard, at the time of giving the mortgage, was not truthful; that in fact they owed more than their assets amounted to. They covered up their real condition by a false statement, well knowing the result if their true condition was made known. It may be true that they hoped to work out, and one means to that end was to obtain time in which to pay their debts. The learned counsel for defendants claim that Tonkin & Trewartha’s view was not to give a preference, but to gain time, and, from profits to be realized from trade, pay their debts: that while the mortgage has operated to give defendants preference, it is because of the failure of the mortgagors to realize their hopes and ex-peetations, and is but an incident, and was not the object of the mortgage. It is said, too, their reluctance and aversion to giving a mortgage is evidence that they did not give it with a view to a preference.
If we pause and ascertain first, that the mortgagors knew they were utterly insol
And the question remains whether defendants had reasonable cause to believe Ton-kin & Trewartha insolvent, and that the mortgage was made in fraud of the provisions of the bankrupt act. This is frequently one of the most difficult, as it is one of the most important questions arising under the law, involving, as it often does, large amounts growing out of payments, mortgages, and transfers by a debtor, and involving questions of construction and fact. Perhaps no precise rule can be laid down which will be applicable to all cases, inasmuch as the determination of each case rests largely upon its own peculiar facts. It is generally held by the bankrupt courts that a trader who is not able to pay all his debts in the usual and ordinary course of business, as persons carrying on trade usually do, is insolvent within the meaning of the bankrupt laws, and I know of no better general rule by which to be governed in considering the facts of a case. It is neither too broad nor too narrow; while, in my opinion, it would be quite too narrow and restricted to hold that failure to pay some one debt when due is evidence of insolvency in all cases under the act, "though I believe it has been held that if a trader does not pay a debt when it matures, he is to be regarded insolvent. This, as a rule applicable to traders generally in this country, I cannot indorse. Whether a single instance of non-payment of a debt at maturity would be evidence in a given case of insolvency, depends somewhat upon the magnitude of the debt, upon the locality -of the debtor, and upon what is the ordinary course of business and custom in that respect of the locality where the debtor resides, and upon such other facts and circumstances as will bear upon the question of insolvency. Suppose a debtor residing in a small country town, in an agricultural district, or in the mining regions of this state, where debtors are not usually prompt to meet their debts as they mature, and an item of indebtedness is not paid at maturity, while at the same time the debtor is of known responsibility, having two dollars or ten dollars of assets to one dollar of indebtedness, and enjoying good credit—to say such debtor is insolvent simply because he fails to pay the debt at maturity, is obviously incorrect. It ignores the usage and course of business recognized between the creditor and debtor class in that locality, and would present the spectacle of the mercantile class saying a trader is solvent, and the courts saying he is insolvent; whereas the courts, upon such questions, should adopt the mercantile usage as the rule of decision. The question is, whether the debtor or trader is able to pay his debts in the ordinary course, as persons carrying on trade there usually do. Hence it may be, and undoubtedly is true, that insolvency in New York, Boston, Philadelphia, and other commercial centers, is not insolvency in small country towns. In the former places, if the debtor’s paper is dishonored, his credit is gone, and he is prima facie insolvent; whereas in the latter localities it is not so. Insolvency is a fact, and not a matter of definition or rule of law, as was said at the argument; and what is evidence of insolvency in London, or Paris, or New York, is not evidence of insolvency everywhere. The rule first stated, that a trader who is not able to pay all his debts in the usual ordinary course of business, as persons carrying on trade usually do, is to be regarded insolvent, is sufficiently liberal to admit all the necessary tests in determining the ques
[Now, Tonkin & Trewartha state their assets at fifty-two thousand dollars; liabilities, twenty-five thousand and thirty-one dollars; and Mr. O’Grady writes, if two thousand dollars are deducted from accounts—calling them three thousand dollars—and ten thousand dollars are deducted for excessive estimate of stock, “this leaves them nearly fifteen thousand dollars ahead.” He reports as incumbering their merchandise a mortgage for eight thousand .dollars, dated October, 1867, payable one thousand dollars monthly, on which fifteen hundred dollars only was paid; and another mortgage given December 24, to secure three thousand two hundred dollars, on which five hundred dollars was unpaid, and due forty days from date of mortgage. This mortgage, he states, was given to prevent their goods being attached for a bill bought in November. Tonkin & Trewartha’s statement, transmitted to defendant by Mr. O’Grady, omitted indebtedness upon the two five hundred dollar drafts before alluded to, and this was noticed by defendants, and Mr.. O’Grady’s attention called to the fact, who accounted for the omission as inadvertence on Tonkin & Trewartha’s part He says, in .his reply, “I have set a good, careful, and vigilant watch upon the concern.” One of defendants, having in charge this business, Mr. Bagley, testifies that when he received Mr. O’Grady’s statement, he believed Tonkin & Trewartha were sound. Early in March defendants procured Mr. Hoar, a man of mercantile experience at Houghton, to go to Eagle Harbor and look after their debt. On the 29th of February, defendants purchased Allan Shelden & Oo.’s debt against Tonkin & Trewartha, at fifty cents on the dollar; most of it was past due; so that in March defendants held about twelve thousand dollars of Tonkin & Trewartha’s indebtedness. Mr. Hoar testifies that, after looking into their affairs, and making inquiries of them, he was satisfied Tonkin & Trewartha were good. He so reported to defendants, and stated their assets over liabilities at twenty thousand dollars. Mr. Chadburn accompanied Mr. Hoar in the interest of defendants, and his testimony accords with that of Mr. Hoar.
[The next step is in the early part of May, 1868, when defendants, being without remittances from their debtors, procured their attorney, Mr. Maynard, of this city, to go to Eagle Harbor and look after their debtors’ standing. Mr. Bagley testifies that his instructions to Mr. Maynard were, “If they were sound, not to disturb them, but give
[Such are the principal and controlling facts of this case, and now the question recurs, had the defendants reasonable cause to-believe their debtors insolvent? The several statements put in evidence, furnished by Tonkin & Trewartha to defendants, are important in the consideration of this question. The one made in October, 1867, represented twenty-one thousand dollars assets over liabilities; that of January following, represented twenty-six thousand nine hundred and sixty-seven dollars; Mr. Hoar, who investigated the condition of the bankrupts in March, reported twenty thousand dollars; and that made to Mr. Maynard and Mr. O’Grady, when the mortgage was taken in May, exhibited not quite thirteen thousand dollars of assets over liabilities. All these statements were made within a period of seven months. Tonkin & Trewartha were surrounded by, and mostly dependant upon a mining population for trade. Mining operations were not active during the winter of 18G7-8—copper was low, and business much depleted—and Tonkin & Trewartha’s. trade had been very light during that winter. The facts were understood by both debtors and creditors.
[In the light of these facts, let the four statements of the debtors be examined; and we must assume that defendants, did not fail
There are, to my mind, exhibited by the facts in this case very strong reasons for defendants not only to have suspected, but believed their debtors insolvent, outside of the consideration that there was other past due indebtedness of considerable amount. Defendants did feel extremely anxious as to the ultimate payment of their debt, as is shown by the evidence. That they distrusted Tonkin & Trewartha’s solvency is apparent from their sending, on three different occasions, agents and attorneys to investigate their debtors’ standing; also, from information received that there had been placed upon the debtors’ stock two mortgages for considerable amounts; and again, from the fact that defendants were not only anxious to obtain security for their debt, but did not rest satisfied until it was accomplished. Now, considered in relation to their own past due debt, it would seem to be the policy of the bankrupt act not to allow a creditor, under such circumstances, to take a transfer of a debtor’s property by way of preference, payment, or security. Transfers made in the usual and ordinary course of a trader’s business, or payments made at the time a debt matures, and in the usual mode of paying debts, are prima facie valid. On the other hand, whenever a creditor is in possession of such facts and circumstances in reference to his debtor’s standing as arouse suspicion with regard to his solvency or ability to meet his indebtedness, the creditor is so far put upon inquiry that he will not be allowed to shut his eyes to those facts and circumstances, and obtain payment of a debt, otherwise than as it matures, or take security or a transfer of property from the debtor to the prejudice of other creditors. If he does so, and his debtor comes into bankruptcy within four or six months, as the case may be, the creditor must be held to have' had reasonable cause to believe his debtor insolvent, and that the transfer was in fraud of the provisions of the bankrupt act. Any other view detracts greatly from the most wholesome operation of the law. Not paying debts in the usual and ordinary course of a trader’s business from lack of present means and want of ability to raise means, must be regarded as prima facie evidence of insolvency, and the creditor who has knowledge of such facts must act in view of them. It is undoubtedly true that defendants and their agents and attorneys had no idea of the utterly insolvent and bankrupt condition of their debtors, as the proofs now show their debtors’ condition to have in fact been. But we must not forget that there .is a clear distinction between insolvency and bankruptcy. A trader may be insolvent and yet not be bankrupt.
•There is one view of this case which settles
[From 3 N. B. R. 602 (Quarto, 149).]
[From 3 N. B. R. 602 (Quarto, 149).]