145 F. 202 | S.D. Iowa | 1906
Alexander Armstrong, several years ago came from Illinois, to Carroll county, Towa, and engaged in farming and raising, feeding, buying, and selling of live stock, doing a large business. He became possessed of about 2,500 acres of land near Glidden, in Carroll county, and later on of more than 000 acres of land in Afonona county. He had several store buildings in Glidden, and about six years since acquired a residence worth several thousands of dollars, in the town, five or six miles from the farm. He was believed by all to be worth more than $200,000, and to be a man of high character, and his credit was measured by his requests. He was able to read in print, but in writing with difficulty. if at all. Eor several years he did part, at least, of his banking business at the German Bank in Carroll, Iowa, known in this case as the “Hess Bank” from the name of the cashier. As time passed, lie left the Hess Bank and became a borrower from former friends in. Illinois, and from live stock commission men in Omaha and Chicago, and from an Omaha bank, presently to be mentioned, and from a bank in Carroll, referred to as the “Arts Bank.” In buying property, he at times would assume the payment of mortgages, but usually-credit was extended him on the strength of his own signature, fichad a son Henry, the owner of much property, for whom he indorsed large sums, who in 1904, became involved. But his suretyship debts, he did not disclose until disaster overtook the son, subsequent to the mortgages in question. Alexander Armstrong, July 27, 1904, filed in this court his petition in voluntary bankruptcy, and August 20, 1904, he was adjudicated a bankrupt.
Wm. Arts, of Carroll, the county seat of Carroll county, is a banker and capitalist. His bank, the German American Bank, known as the “Arts .Bank,” is a private bank of S50.00Q capital. Arts Is a roan of wealth, but in what sum is not disclosed. He is 64 years-of age, and for the past two or three years, has been in bad health. He has three sons, W. A., Joseph, and Frank. W. A. Arts is his father's hank cashier. But Air. Arts himself, when his health permitted, directed and controlled his affairs. Neither of the sons had any ownership ill the bank, nor in the father’s affairs. Joseph does not seem to have had much, if anything, to do with the matters in
The Union National Bank is of Omaha, with G. W. Wattles as its president, and Mr. Thomas as its cashier. Wattles had resided in Carroll county, Iowa, was acquainted with Mr. Armstrong, both before and since he (Wattles) removed to Omaha 12 years ago. June 13, 1904, Armstrong gave his note evidencing his indebtedness to the Wattles bank for $22,000, and a mortgage securing the same on the lands in both counties. He also gave for the same purpose a chattel mortgage on all his farm machinery and the crops for 1904, on the Carroll county farm. This note and these mortgages were taken.in the name of G. W. Wattles, trustee, for conveniencé, the Union National Bank in fact being the owner. After taking the mortgage of $98,503.32, Arts continued business with Armstrong; the latter drawing checks on Arts’ bank, thereby creating overdrafts aggregating near $3,000, which, with other indebtedness amounted June 17, 1904, to $5,512.40. On that day Armstrong gave Arts a mortgage to secure that sum, conveying 615 acres of Monona county land. Arts seeks to enforce that mortgage, and the trustee assails it as being an unlawful preference, as having been given within four months of the bankruptcy proceedings, and given to secure a prior indebtedness. These three claims have been submitted to the court. They were referred to the referee who took and has reported the evidence with his findings of fact, practically all of which are assailed by exceptions, some by one party, and some by others. While the court indorses some of the findings, but not all, the case is simplified for this court, and perhaps for the Appellate Court, if an appeal or proceedings for review be taken, by making independent findings of fact.
First, as to the McPherson claim:
The note for $22,000 is negotiable in form. McPherson bought it before due, knowing nothing of its consideration, nor that it was a renewal of prior notes, and knew nothing concerning any facts connected with the mortgage. In the usual course of business he paid Wattles in money, its full face value. A few days before buying the note, he knew»of a proposed attachment suit against Armstrong, and was asked to become a surety on the bond. He declined to become such surety, and advised against bringing the ac
The McPherson claim was secured by mortgages. At the time they were given, Wattles and his bank had learned of the Arts mortgage. Mr. Thomas, the cashier, went to Armstrong to ascertain his financial standing which resulted in Armstrong giving him a signed written statement. That statement was to the effect that he owned Iowa real estate of the value of $223,400, after omitting his homestead. He placed the value of his homestead at $12,000. Tie placed his real estate mortgages, including the one to Arts, at $147,500, leaving the net value of his real estate, aside from his homestead, at $65,940. He represented his cattle, horses, hogs, and machinery to be worth $19,300, and his other debts, including that of Wattles, $17,900. Counting his homestead, his net worth, then according to his own schedule, was $54,340, and omitting his homestead his net worth, as per his statement, was $42,340. In my opinion the homestead should not be considered on the question of solvency or insolvency, although as eminent a judge as Judge Hammond held otherwise in Re Bauman (D. C.) 96 Fed. 946, and the letter of the statute sustains that holding.
In the year previous Armstrong made a written statement to Wattles’ bank for the purpose of obtaining credit, now covered by the note and mortgages in question, in which his property, including his homestead, was listed at $246,750, and his liabilities at $36,000. Armstrong was believed by Wattles and his associates in the bank, as well as by the people generally, to be a man of integrity and high character, and in all respects worthy of belief. That Wattles and his cashier, in taking the security, believed Armstrong to be solvent, I have no doubt, and it is equally clear that Armstrong
The evidence fails to persuade me that Armstrong then knew that he was insolvent, and much less does it tend to persuade me that Wattles or his cashier knew of it. The fact that he was then insolvent is but one link in the chain of evidence. The facts are that Arts’ mortgage started the talk. Then he gave the Wattles mortgage, insisting he would and could pay all claims in full. Then, after conferences, he concluded that bankrüptcy proceedings would be profitable to him. He then recalled, and, for the first time in many years, if ever, he made known a very large claim of 20 years standing, due, as he says, to his wife. This claim was known by no one but himself and wife, and for years had been barred by the statute of limitations, but for the fact, that he only could plead the statute, and his own interest suggesting it, he waives the statute. And to make such waiver effective, he recalls, so he says, that he knew he was insolvent when he made the mortgages.
As to the Arts mortgage, the case is much stronger. Arts was not asking for a mortgage, and never had asked it. He was an old man, and had been stricken with disease. His cashier was content with the situation. His daughter working in the bank made no suggestion, nor did his other resident son. All of them, as a matter of filial duty, and probably by prospect of inheritance, were interested. Thereupon, his son from Nebraska comes to remain with the father during what was supposed to be his last illness. And this son, a business man, loitering about the bank, most sensibly said that Armstrong’s indebtedness held by a feeble old man, was, too large, and had run too long without security. The mortgage was requested for that reason, and it was given. And if this amounts to the dignity of proof of insolvency or knowledge thereof, then no man can safely close his affairs. The contention is that there was an oral agreement to keep it from record. This is not only denied by evidence of the most substantial and detailed character, but
A different state of facts exists as to the mortgage taken by Arts to secure the overdrafts referred to and some omitted indebtedness. That was the creation of an unlawful preference. Time had elapsed since taking his large mortgage, and a different situation existed, and the facts were becoming known. But as to the large mortgage of Arts, and the one to Wattles, on the foregoing facts, what is the law and how shall it be applied? Of course, all parts of the statute of 1898 and the amendments of 1908 must be construed together, and every provision must be given a meaning. And the. apparent conflicting recitals can only be given a meaning as intended by Congress, by applying the provisions applicable to the facts. A statute arbitrary in its provisions can he interpreted in no other way.
The question is: What is the law of the case in hand ? And in arriving at that the question is: What has been decided in cases similar to this? and not, what has been said by argument on other questions? That the scope of the statutes is that the bankrupt is to he protected and discharged, and his estate as owned by him four months prior to the adjudication, as said in one case by Judge San-born (Swarts v. Fourth Nat. Bank, 117 Fed. 1, 54 C. C. A. 387), is
By giving the mortgages, the question is not whether Armstrong committed acts of bankruptcy, and whether he could have been adjudicated a bankrupt in an involuntary proceeding, because this is a proceeding in voluntary bankruptcy. It was .upon his own petition that he was adjudicated. Therefore the provisions of section 3, Act July 1, 1898, c. 541, 30 Stat. 546 [U. S. Comp. St. 1901, p. 3423], have no relevancy. But if mistaken as to this and if section 3 is relevant, then the language of the section shows that the preference condemned is the one made by the debtor with the intent by him to prefer such creditor over his other creditors. This is not a case where Arts or Wattles has received a preferexxce, and is urging a claim with or without surrendering the preferexice, and, therefore, section 57g (30 Stat. 560 [U. S. Comp. St. 1901, p. 3444]) is not controlling. And if 57g has the slightest relevancy it will be -seen that the amendment of 1903, Act Feb. 5, 1903, c. 487, § 13, 32 Stat. 799 [U. S. Comp. St. Supp. 1905, p. 689], specifically refers to such preferexrces as can be avoided under 60b or 67e. Act July 1, 1898, c. 541, 30 Stat. 562, 564 [U. S. Comp. St. 1901, pp. 3445, 3449]. This is not a case wherein either Arts or Wattles is seeking to enforce a mortgage void under the Iowa laws, nor xmder the general unwritten law, as havixig been made or received with the intent to hixxder, delay, or defraud creditors. The mortgages were authorized uxider the Iowa laws, and there is no fraud on the part of the mortgagor or the mortgagee, and no purpose to hinder, cheat, defraud, or delay any creditor. Therefore, neither the statute denouncing conveyances actually fraudulent, nor the state ■ laws, control this case. And this is not a case wherein the trustee is seeking to recover property, including money turned over or paid, as an unlawful preference. Therefore section 70 (30 Stat. 565 [U. S. Comp. St. 1901, p. 3451]), which provides that certain property shall vest in the trustee, and what property he can recovex-, is not decisive.
But this case, restated, is one where a debtor in fact insolvent, makes a mortgage to secure prior indebtedness within four months, free from fraud, believing he is solvent, and the mortgagee believing the same, and not having facts which would lead him to believe in insolvency. Section 60a, defines that to be a preference, but neither as an actual nor a constructive fraud. 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445], Sectioxx 60b provides that the trustee can avoid such preference by an action, or defensive proceedings
In re Eggert, 102 Fed. 735, 43 C. C. A. 1, by the Circuit Court of Appeals, Seventh Circuit. The cases under the statute of 1867 are reviewed and elaborately discussed. The mortgage was within four months, was for a prior debt, and made when the debtor was insolvent. But the mortgagee did not know of the insolvency, and the trustee was ordered to pay the claim in full, and the order was affirmed. After reviewing the cases, Judge Jenkins says:
“The resultant of all these decisions we take to be this: That the creditor is not to be charged with the knowledge of his debtor’s financial condition from mere nonpayment of his debt, or from circumstances which give rise to mere suspicion in his mind of possible insolvency; that it is not essential (hat the creditor should have actual knowledge of, or belief in, his debtor’s solvency, but that he should have reasonable cause to believe his debtor to be solvent; that if facts and circumstances with respect to the debtor’s financia! condition are brought home to him, such as would put an ordinarily prudent man upon inquiry, the creditor is chargeable with knowledge of the facts which such inquiry should reasonably be expected to disclose.”
Hackney v. Raymond Bros. Clarke Co., 94 N. W. 822, by the Supreme Court of Nebraska. The case was one brought by the trustee to recover property turned over within four months by an insolvent on a prior debt. The trustee was defeated and the case was affirmed largely on the strength of the Eggert Case.
In re Virginia Hardwood Company (D. C.) 139 Fed. 209, by Judge Rogers, of the Western Arkansas District. The mortgage was defeated, but only because of the facts, that an unlawful preference was intended, he having such knowledge of the insolvency and knowing that a preference was intended.
In re Graham (D. C.) 110 Fed. 133, decided by Judge Humphrey, of the District of Illinois. On the facts, the court held that the transfer within four months was made and received with the intent to create a preference, and therefore was set aside.
Egan Bank v. Rice, 119 Fed. 107, 56 C. C. A. 157, by the Circuit Court of Appeals, Eighth Circuit. The court held that the chattel mortgage in part to secure a prior debt, executed within four months, was fraudulent, because allowing the mortgagor to remain in possession and sell.
Pollock v. Jones, 124 Fed. 163, 61 C. C. A. 555, by the Circuit Court of Appeals, Fourth Circuit. The mortgage was for a prior debt executed within four months. The mortgage was avoided on two grounds: (1) Executed by one of the firm only; (2) because both mortgagor and mortgagee knew that a preference was created.
McNair v. McIntyre, 113 Fed. 113, 51 C. C. A. 89, by the Circuit
Counsel on both sides in the case at bar, most earnestly contended at the argument that the recent case by the Supreme Court of Keppel v. Tiffin Bank, 197 U. S. 356, 25 Sup. Ct. 443, 49 L. Ed. 790, is in point. But it is not. That was a case on the one question, of the meaning of the word “surrender” under section 57g. And that court held, four judges dissenting, that when a mortgage was adjudged to be an unlawful preference, that the mortgagee could then participate as a general creditor, because he then had “surrendered.” On that question the case is an authority, and on no other question. And Swartz v. Bank, 117 Fed. 1, 54 C. C. A. 387, was with reference to the surrender feature covered by 57g.
I conclude this opinion, by stating my general conclusions. Section 67e has reference to conveyances and transfers involving moral turpitude and which are fraudulent in fact. Section 60a defines the word “preference,” while 60b provides what preferences can be .avoided, and the two must be construed 'together and as a whole. If this be not so, then I am unable to see the purpose that 60b can serve. And the preference to be avoided must not only be a mortgage or transfer executed by an insolvent within four months, and to secure a prior debt, but the mortgagee when taking it must have had reasonable cause to believe it was intended to give him a greater per cent, than the other creditors would receive. I appreciate the importance of the argument that the property of the bankrupt is to be equitably and ratably apportioned among the creditors. Much can be said as to that, and in many cases such is the law. But the term “creditors” does not mean all creditors, and when the law is so made to mean, then credit, as well as business ■ generally is at an end. General principles of jurisprudence must govern in business circles, except as changed by statute. And when Congress enacted section 3 against preferences it was provided to be unlawful only when the debtor intended the preference, and by section 60b.
The holding is that Arts, as to his large claim, and Wattles, as to his claim, had no such intent. Those two claims will be paid by the trustee. The other claim of Arts will stand as an unsecured claim.