Fifth Third Nat. Bank v. Johnson, 219 F. 89

Fifth Third Nat. Bank v. Johnson

219 F. 89 | 6th Cir. | 1915

DENISON, Circuit Judge

(after stating the facts as above). [1] The Ohio statutes invalidate a conveyance made with intent to de*92fraud creditors. The Bankruptcy Act (section 67e) does the same thing in'the same language, except that there is a four-months limitation. It is not clear that the same words can mean one thing in the Bankruptcy Act and mean another thing in the state law, and that at the same time the federal law can be contemplated as establishing a uniform system of bankruptcy throughout the United States; but, however that may be (and we return to the subject hereafter), we are not satisfied that as a matter of settled Ohio construction the words have any different sense from that given to them by the Supreme Court of the United States in Coder v. Arts, supra, and reaffirmed with emphasis and elaboration in Van Iderstine v. National Discount Co., 227 U. S. 575, 582, 33 Sup. Ct. 343, 57 L. Ed. 652.

The discussion in the two cases just cited makes very clear that, as matter of accepted general construction and by the inherent meaning of the words, a preference is not, merely because it is a preference, a fraudulent conveyance, and that from the same viewpoint a conclusion of intent to “hinder, delay or defraud creditors,” based only on the accomplishment of a preference among honest creditors, cannot stand. It follows that, before we can accept the contrary construction as part of the law of Ohio which we must follow in applying the statute^ of that state, it must have been clearly declared by its courts. In support of this contrary construction, we are cited to two Ohio cases. Jamison v. McNally, 21 Ohio St. 295; Stivens v. Summers, 68 Ohio St. 421, 438, 67 N. E. 884. These do hold that a deed is obnoxious to this Ohio statute, if it is constructively fraudulent as well as if it is actually fraudulent; but this rule does not reach-a conveyance free from criticism., except because it is a preference. Such a conveyance is, for that reason alone, no more constructively fraudulent than it is actively fraudulent. It is not fraudulent at all, unless some statute makes it so, constructively. As was said by Mr. Justice Lamar in the Van Iderstine Case, speaking of intent to prefer and intent to defraud (227 U. S. 582, 33 Sup. Ct. 345, 57 L. Ed. 652):

“But the two purposes are not of the same quality, either in conscience or in law, and one may exist without the other. The statute recognizes the difference between the intent to defraud and the intent to prefer, and also the difference between a fraudulent and a preferential conveyance. One is inherently and always vicious; the other innocent and valid, except when made in violation of the express provisions of a statute. One is malum in se and the other malum prohibitum, and then only to the extent that it is forbidden.”'

Stivens v. Summers, 68 Ohio St. 421, 438, 67 N. E. 884, was an attack on a deed made by an. insolvent without adequate consideration, and therefore constructively fraudulent against existing creditors. Obviously it does not reach a deed merely preferential. Jami-son v. McNally was the same kind of a case. So far as the conveyance secured a debt, and was thereby apparently a preference, it was sustained. It was pronounced constructively fraudulent and within this statute only as to the surplus value above the debt secured;. that is, only to the extent that there was no consideration. This decision, therefore, furnishes no support for thinking that, in Ohio, a merely preferential conveyance is obnoxious to-the “hinder, delay or *93defraud” clause; and we find no later decisions of the Ohio Supreme Court more closely applicable. It is to be noted that since the Ohio statute above quoted took practically its present form in' this respect, in 1898 (93 Ohio Laws, p. 290), all preferential transfers by an insolvent have been forbidden as expressly and absolutely as are fraudulent conveyances, and so there has been no occasion to expand, by construction, the prohibition of the latter so as to reach the former. In the absence of any statutory forbidding or regulating of preferences by insolvents, cases have frequently arisen where the preference given has seemed unconscionable, and of such character are most, if not ail, of the decisions which have treated particular preferences as within the statute of fraudulent conveyances in its original form; but where preferences are expressly forbidden by law, or where some are forbidden and some permitted, so that they are directly affected and controlled by one statutory provision, there seems no occasion nor room for resorting to the constructive and indirect effect of another provision in the same or in another statute.

[2] It is next said, because the corporation was in fact insolvent, and because Joseph and Warner were controlling directors and were by this transaction personally indemnified on account of their surety-ship for their corporation, that there was a constructive fraud, and that Rouse v. Bank, 46 Ohio St. 493, 22 N. E. 293, 5 L. R. A. 378, 15 Am. St. Rep. 644, compels this conclusion. As a construction of the Ohio statute, this case must be followed by this court; but the Supreme Court of the United States has said that this decision “proceeded in part upon a theory that the property of an insolvent corporation is a trust fund for its creditors in a wider and more general sense than could be maintained upon general principles of equity jurisprudence.” Smith Co. v. McGroarty, 136 U. S. 237, 241, 10 Sup. Ct. 1017, 34 L. Ed. 346. The Supreme Court again expressed its disapproval of the extreme doctrine when, speaking by Mr. Justice Brewer in Sanford Co. v. Howe Co., 157 U. S. 312, 318, 15 Sup. Ct. 621, 623 (39 L. Ed. 713), it said:

“Are creditors, who are neither stockholders nor directors, but strangers to a corporation, disabled J!rom taking security from the corporation by reason of the fact that upon the paper they hold there is also an indorsement of certain of the directors or stockholders? Must, as a matter of law, such creditors be content to share equally with the other creditors of the corporation because, forsooth, they have aiso the guaranty of some of the directors or stockholders, whose guaranty may or may not be worth anything?”

And see full review of decisions in Hollins v. Brierfield Co., 150 U. S. 371, 385 (14 Sup. Ct. 127, 37 L. Ed. 1113).

From the same point of view, Judge (later Mr. Justice) Lurton, speaking for this court, said in Rickerson v. Farrell, 75 Fed. 554, 565, 23 C. C. A. 302, 313:

“This court has not adopted the theory that the assets of a corporation become a trust fund in the hands of its directors, l‘or equal distribution among all creditors upon the occurrence of insolvency. * * * If such a corporation may prefer a stranger who is a creditor, it may, likewise, prefer one of the corporators,”

*94To the same effect see Judge Taft’s opinion in Brown v. Grand Rapids Co., 58 Fed. 286, 292, 7 C. C. A. 225, 22 L. R. A. 817.

These cases admonish that Rouse v. Bank must not lead us beyond the real point there decided, which seems to be that the trust which makes it a constructive fraud to prefer one creditor over another arises when a corporation has abandoned the objects of its organization, yielded up dominion of its property to its creditors for administration and ceased to be a going concern. This interpretation and this limitation are confirmed by Damarin Co. v. Huron Co., 47 Ohio St. 581, 590, 26 N. E. 37, arid were adopted by this court in Haines v. Bank, 203 Fed. 225, 121 C. C. A. 431.

[3] The record does not justify a conclusion that when the deed and. mortgage were' given, or that when the notes and money were distributed the equipment company had ceased to be a going concern. It was doubtless insolvent, and it was discontinuing a part — the larger part — of its business; but it was retaining assets having a book value of more than $200,000 and having actual value such that the later bankruptcy appraisal showed $37,000. Its debts above those to the banks were comparatively small. It had a large amount of personal property to sell and of accounts receivable to liquidate fin connection with the branch of business discontinued, and it intended to continue another branch which had been profitable and might be-again. In short, instead of yielding up dominion over all its property and going out of business, it was retaining dominion for the purpose of making its own present and future arrangements with creditors, and it was continuing its corporate operations, expecting to avoid a collapse for some little time, and hoping to do so permanently. Since the- Supreme Court in the Brierfield and Sanford Cases disapproved the extreme application of the trust fund theory, we find no authoritative or persuasive decision authorizing its use in a case like this. Instances of application have been either where there had been com•plete abandonment of the status of “going concern,” or where, as in the Rickerson Case, the managing directors had taken advantage of their position to mislead the' unsecured creditors.

Rev. St. § 6343 (Gen. Code, § 11104) also invalidates any preferential conveyance by an insolvent, and this provision is said to inure to plaintiff’s benefit through the operation of section 70e. If it were necessary to pass upon this question in order to decide this case, it so far suggests conflict between the Ohio statute and the purpose of the Bankruptcy Act to establish a uniform rule, and is so closely analogous to the matter involved in Stellwagen v. Clum, 218 Fed. 730, 134 C. C. A. 408 (opinion filed November 4, 1914), that we might find it necessary to certify the question, as we did there; but, for reasons to be stated, we think that should not be permitted to be, on this review, the controlling issue.

[4] The question of preference being passed, and the question of constructive fraud because of preference or because of the trust fund theory being eliminated, there remains the question of actual fraud, as defined in the Van Iderstine Case. The District Court did not make any finding on this subject. We think the record forbids the *95conclusion that there was any unfairness in the transaction, unless unfairness is inherent in a preference by an insolvent corporation of a bank debt upon which its directors and managers are personally liable. The agreed price, $50,000, was a fair price; it was much less than the book value, but it was more than any offer which had ever been received after months of effort to sell; and the record strongly indicates that it was a good bargain for the seller and a bad one for the purchaser. Warner and the Warner Company have not appealed from the decree, which took the property away from them and relieved them from the payment of the purchase price. True, if there was a value in the property and good will above the purchase price, Warner would get a benefit from it; but no one would buy such a property who did not expect to make a profit — and a large one — and Warner was the only person in sight specially fitted to take the property over and carry on the business. His connection with the transaction was entirely open, and there accrued to him no concealed advantage and no actually unfair advantage — nothing save the preferential benefit. Neither the equipment company nor Joseph retained any interest of any kind in the property or had any advantage from the deal, except that the corporation debts were reduced and Joseph’s suretyship liability correspondingly modified. Upon the theory of actual fraud, the bill must fail; and, from what has been said, it is evident that the decree below must be reversed.

[5] This would, ordinarily, lead to a direction that the bill be dismissed; but we are not satisfied to make that final disposition of the case. The theory that there was a preference in violation of the Bankruptcy Act (or of section 6343, Rev. St. Ohio) discloses, upon the facts proved, a meritorious controversy that ought to be decided, and that might better be decided in this case than in another case to be now commenced. This theory does not necessarily affect the conveyance and notes as much as it does the later distribution of the notes and money, and yet the two are closely involved. The deed has been set aside as against Warner, and he has not appealed. That it should be invalid as to him and yet valid to the extent of the interest of the banks suggests complications. Further, it would seem that a final decree now made or directed by us would be appealable to the Supreme Court, and that court might think that the pleadings sufficiently raised the issue of preference under the Bankruptcy Act, and might finally decide the case on that issue. Since the District Court sustained the defendants’ contention that this issue was not on trial, it is probable that they did not take their full proofs on that subject, and a final decision on the present record might be unjust. Under these unusual conditions, we see no way to insure that the full controversy shall be finally decided, in this case and upon a proper record, save to direct that the decree be reversed as to appellants and the case remanded; that the plaintiff have opportunity to amend his bill so as sufficiently to allege a case of preference both under the state law and the Bankruptcy Act; that, if he does so, the defendants have opportunity to amend their answer, and that both parties take further proofs, if desired, on these issues; and that a de*96cree be entered thereupon as to the District Court shall seem proper. If plaintiff does not care to amend, his bill shall be finally dismissed as against appellants.. Appellants will recover costs of this court.

It should be understood that we look upon that part of Rev. St. § 6343 (section 11104, Gen. Code); above quoted as covering two measurably distinct subjects, which, until 1898, had always been found in separate sections. So far as the section affects preferential conveyances by an insolvent we have refrained from any discussion, reserving that subject for future consideration and decision or certification, if it shall eventually seem to'present a controlling question. So far as this section invalidates conveyances for other reasons than because preferential, we do consider it, and we reverse the case upon that issue alone.

[6] Since the court below had not lost control of its decree when this appeal was taken, and its power has been suspended pending the appeal, we think (without intimating any opinion as to the rightful course) that it will now have power to vacate or revise its decree as to Warner, if it shall think justice requires such course.