265 F. 769 | N.D.N.Y. | 1920
(after stating the facts as above). At the times mentioned the City Bank was a banking institution or company of the city of Syracuse, doing business as such. Prior to April 15, 1916, the now bankrupt and one Ahlheim became copartners in trade in
About one week prior to the filing of such petition in bankruptcy the bank caused a thorough examination to he made of the book accounts, assets, and liabilities of said Cross, and the result of this examination was reported to the bank. After the receipt of this report the bank sent a notice to each debtor of Cross that it, and not Cross, was the owner of all such accounts owing to Cross, but for such assignment, and that same should be paid to it, and not to Cross, and so far as paid same were thereafter paid to the bank, and since the petition was filed the bank has collected and received on such assigned accounts the sum of $13,555.63. At that time Mr. Cross was actually insolvent, and the bank had notice and knowledge of the fact. Cross had a stock in trade valued at $15,025.57, and was owing various creditors on unsecured claims $35,015.86. The special master finds, and the evidence shows, that the accounts originally assigned to the bank were substantially all replaced by new accounts substituted by assignment of same under the agreement and by daily assignments.
On the day the petition in bankruptcy was filed against Cross, October 25, 1916, the officers of the bank called Cross into the bank and informed him in substance that matters could not go on longer,
The transaction, according to the statement of Cross, and fully corroborated by the check and note, has all the “earmarks” of a payment, and none of those of a set-off. If the note was due, the bank, but for the special agreement, had the undoubted right of set-off, and the right to exercise it. It was not under any obligation to exercise such right. It had the undoubted right to demand payment of tire note, as it was a demand note, and payment had not been demanded or requested, and to accept and receive payment in whole or in part, and ask and accept a new note for the balance. Cross describes what transpired as follows:
“Q. On October 25, 1916, did yon have a talk with Mr. Ellis and Mr. Chapman in reference to your business matters? A. X did.
“Q. Where was that conversation? Where did it take place? A. I talked with Ellis first at the City Bank, and we adjourned to what I now recall as Mr. Chapman’s' office in this building, Onondaga County Savings Bank Building, which was right near the City Bank, and Mr. Chapman was called in, or met there by appointment, by Mr. Ellis.
“Q. How did you happen to go over and see Mr. Ellis that morning? A. He telephoned for me to come over.
“Q. What talk did. you have with Mr. Ellis that morning, before you came up to Mr. Chapman’s office? A. I don’t recall a word that was said until we came upstairs.
“Q. What took place after you got to Chapman’s office? A. Reference to the letter was made by myself.
“Q. What did you say, as near as you can recollect? A. I was asked what I proposed to do, and I replied that on account of the letter there was nothing*773 left, for me to do but go into bankruptcy, or be forced into bankruptcy. Then tlie matter of signing this cheek, which they wanted me to sign, was brought up.
“Q. What was said about Hint? A. Mr. Kills, as I recall, said that there was a balance in the bank which they wanted to convert to the note, or apply on tlie note, or to my account, as be called it, and I believe he sent for Sanford to figure out the exact amount, giving credit for this flour, and had the check made out for me to sign, requested me to sign it, and T did sign it.
“Q. That check was for about $2,700? A. As I remember it, 82,700 and some dollars.
“Do you recollect any other talk you had there that day? A. I remember asking if the outstanding checks would be honored, and they told mo that they would not bo; that they would be sent back.”
The special master has found as to that transaction as follows:
“The transaction occurred on the day when the petition was filed. Whether before the filing or after does not appear. The transaction boars the earmarks of a payment. The cheek was given, and thereupon the amount thereof was applied upon the old note, which was then surrendered, and a new note taken for the balance. While the situation afforded the bank an opportunity, later and in ordinary course, to retain this balance as an offset upon adjusting its claim against the bankruptcy estate, 1 conclude that what it did do was lo accept Mr. Gross’ check as a payment, and that the payment having been made with knowledge of both parties of the insolvency of the drawer, and upon the day of the filing of the petition, that the trustee may recover the same as preferential. * * *
“(G) On the morning’ of the 25th of October, the date of the filing of the petition, the general deposit account of said John M. Gross in said bank above referred to showed a balance in bis favor of $2,755.24. On that day, upon the request of officers of said bank, John M. Ooss executed and delivered to the bank a check for the amount of the balance to his credit in said account and delivered to the bank a new note, payable on demand, for the difference between the amount due upon Pie original note of $18.000 and the amount of his check, namely, 815,226.70. and received in exchange the original note for 818,-000, surrendered to him by the bank.”
Assuming that the amount due Cross was transferred to the bank as a payment on the note under such circumstances, was it the giving of a preference which may be recovered by the trustee in bankruptcy for the benefit of general creditors? Tins is a case of conceded insolvency, existing and known to both parties at the time the check was given, and the money transferred by means thereof and applied on the note. On-the one hand, we have the equities of the bank; and on the other hand, the equities of the general creditors. The result of
“A set-off exists only by virtue of statute, and was unknown at common law, according to wbicb mutual debts were distinct and inextinguishable, except by actual payment or release, and a defendant who bad a demand against plaintiff was compelled to resort either to his cross-action or a bill in chancery ; but the right of recoupment, being formerly so very limited, gave rise to the necessity of the enactment by statute of the remedy of set-off, which was designed by allowing set-offs in actions at law to supersede bills in equity for that purpose, and which was derived from the compensation of the civil law, and the two systems are analogous in many particulars. * * *
“The power to compel a set-off of debts was exercised by courts of equity prior to any statute on the subject, and exists independent of those statutes, being allowed upon the general principles of equity and upon the equitable jurisdiction of the court over its suitors, and statutes allowing set-offs have not taken away the equitable jurisdiction, but have merely provided a remedy at law for the set-off of mutual claims between parties, which might always have been done in equity, and were passed mainly to obviate the necessity of a resort to equity in every case of mutual independent claims upon both sides.”
“Where a set-off is otherwise valid, it is not perceived how its allowance can be considered a preference, and it is clear that it is only the balance, if any, after the set-off is deducted, which can justly be held to form part of the assets of the insolvent.”
In that case the court was applying the ordinary equity rule of set-off, and held:
“The ordinary equity rule of set-off in case of insolvency is that, where the mutual obligations have grown out of the same transaction, insolvency, on the one hand, justifies the set-off of the debt due, on the other; and there is nothing in the statutes relating to national banks which prevents the application of that rule to the receiver of an insolvent national bank under circumstances like those in this case.”
“The requirement as to ratable dividends is to make them from what belongs to tiie bank, and that which at the time of the insolvency belongs of right to the debtor does not belong to the bank. There is nothing new in this view of ratable distribution. As pointed-out by counsel, the Bankruptcy Act of 13 Kliz. c. 7, contained no provision in any way directing a sot-off or the striking of a balance, and by its second section commissioners in bankruptcy were to seize and appraise the lands, goods, money, and chattels of the bankrupt,, to sell the lands and chattels, ‘or otherwise to order the same for true satisfaction and payment of the said creditors, that is to say, to every of the said creditors a portion, rate and rate alike, according to tlie quantity of his or their debts.’ 4 Statutes of the Realm, part 1, p. 589. Net, in the earliest reported decisions upon set-off, it was allowed under this statute. Anonymous, 1 Mod. 215; Curson v. African Co., 1 Vern. 121; Chapman v. Derby, 2 Vern. 117. The succeeding statutes were hut in recognition, in bankruptcy and otherwise, of the practice in chancery in the settlement of estates, and it may be said that in the distribution of the assets of insolvents under voluntary or statutory trusts for creditors the. set-off of debts due has been universally conceded. The equity of equality Among creditors is either found inapplicable to such set-offs or yields to their superior equity.”
Section 68 of the Bankruptcy Act of 1898 provides as follows:
“a. Tn all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the, account shall be stated and one debt shall be set off against the other, and the balance only shall he allowed or paid.
“b. A set-off or counterclaim shall not ho allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate: or (2) was purchased by or transferred to him after the filing of the petition, or within four months before such filing, with a view to such use and with knowledge of notice that such bankrupt was insolvent, or had committed an act of bankruptcy.” Comp. St. § 9852.
In Studley, as trustee, etc., v. Boylston, 229 U. S. 523, 33 Sup. Ct. 806, 57 L. Ed. 1313, it is held that this provision of the Bankruptcy Act did not create the right of set-off, but recognizes its existence and provides a method for its enforcement, even after bankruptcy. In that case it was found that the deposits in bank and payment of notes therefrom were not made to enable the bank to secure a pref - erence by the exercise of the right of set-off, but in due course of business. In the instant case there was an agreement by which, while the now bankrupt could collect the assigned accounts and deposit the 'proceeds to his credit, and draw and use same in the conduct of his business, on assigning other and new accounts to take their place, which was done, still there was a limitation on the use of such deposits, but: nothing which interfered with the right of Cross to check out the fund, or any part, and use the money to pay his debts incurred in the running of the business, or the note in question, which* represented loans used by Cross in conducting.such business.
“$15,226.76. Syracuse, N. Y., Oct. 25, 1916.
“On demand after date I promise to pay to the order of myself fifteen thousand two hundred twenty-six 76/190 Dollars, for value received, payable at the City Bank of Syracuse, with interest.
“I have deposited or pledged as collateral security for the payment of this note:
Corporation. Issue. Numbers.
“Assignments of accounts as per lists already in hands of City Bank of Syracuse.
“The margin of collaterals hereunder shall always be kept good as at present, and at not less than 25 per cent., and in default thereof, this note shall immediately become and be payable on demand, and I hereby give to the holder hereof full power and authority to sell or collect at my expense all or any portion ^thereof, at any place, either in Syracuse, New York, or elsewhere, at public or private sale, or otherwise at holder’s option, on the nonperformance of the above promise, and at any time thereafter, without advertising the same or otherwise giving me any notice. In case of sale thereof, public or private, the holder may purchase without being liable to account for more than the net proceeds of such sale, and any surplus arising in any manner from said collateral may be applied on any other indebtedness now or hereafter owing by me to said bank for which I am or may be liable in this manner.
“LSignedl John M. Cross.”
“The City Bank 50 — 43.
“ ‘Of tlie People — By the People — For the People.’
[Picture “Syracuse, New York, Oct. 25th, 1916.
The “Pay to the order of City Bank “>2,755.24, twenty-seven hundred
City fifty-íívo and 24/100 dollars, proceeds of collections from assigned Bank.! accounts.
“East Genesee Street
‘‘Between
“Salina and Warren Streets. No. ———. John N. Cross.”
If a voucher was desired to show that the right of set-off had been exercised, an appropriate paper reciting the fact would have been drawn, executed, and delivered. I search the evidence in vain for any reference by either party during the transaction to the exercise of the right of set-off or the existence of such right. In the absence of all reference to set-off, it seems to me, the special master was right in determining that what, the parties actually said and did determine what their purpose and intent was. As is said in In re National Number Co. (People’s Bank, etc., v. Fell) 212 Fed. 928, 129 C. C. A. 448:
“Tim parí ira chose to pay and to accept the money in the ordinary course of ('vents, and their conduct is to be judged by what they did, not by what they might have done. Bank v. Campbell. 81 U. S. (14 Wall.) 87, 20 L. Ed. 832.”
In the. case just cited the facts show that the depositor gave a note of $3,000 to the bank, and that the bank later, and before maturity of the note, learned that the maker was insolvent. The depositor began to accumulate deposits in the bank, discounting some customer’s notes for the purpose, refusing to have other notes, when due, charged to its account, as had been its custom, and when the deposits equaled its note a check was drawn on the bank, and given to and accepted by it in payment of the note, which was surrendered before its maturity. The Circuit Court of Appeals, Third Circuit, held this was not a set-off, but a payment, and a recoverable preference. The court said:
“Clearly every element of a preference is here. The only defense is that section 68a applies and relieves the bank:
“ ‘a. In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set olf against the other, and the balance only shall be allowed or paid.’
“The general meaning of this clause is plain enough, and we need hardly refer to the discussion in Bank v. Massey, 192 U. S. 138, 24 Sup. Ct. 199, 48 L. Ed. 380, cited in Bank v. Chicago, etc., Co., 229 U. S. 435, 33 Sup. Ct. 829, 57 L. Ed. 1268. The difficulty is that the decision does not lit the facts of the present ease. If the company had allowed the money to remain in its account until after bankruptcy had supervened, a situation would have been presented to which the clause might have applied. But this was not done. The money was actually drawn out by the company — for this was the effect of its check— and was actually handed over to the bank in payment of the note, so that we do not have a case of mutual accounts where one may be set off against the other, but the case of the use of money to pay a debt under circumstances that made, the payment preferential. The argument really comes to this: If the payment had not been made, the bank could have set off the deposit against the note, and the result would then have been just what it is now. The sufficient*778 answer is — the contingency did not happen. The parties chose to pay and to accept the money in the ordinary course of events, and their conduct is to be judged by what they did, not by what they might have done. Bank v. Campbell, 81 U. S. (14 Wall.) 87, 20 L. Ed. 832.
In the instant case we have a demand note, not one paid before maturity.
In Traders’ Bank v. Campbell, 81 U. S. (14 Wall.) 87, 97 (20 L. Ed. 832), as to one of the matters involved the court said:
“There was in the bank on deposit to the credit of Hitchcock & Endicott on the day they gave the judgment note, the sum of $325.20. This sum was not computed or. deducted when the note was given. On the next day, before the bank caused the judgment to be entered up, they credited this amount on the note, and took judgment for that much less. They now assert that this was what they had a right to do, and that it should remain a valid set-off. But this does not appear to have been really what -was done. It appears that ■ Hitchcock & Endicott gave the bank a check for the sum, and by virtue of that check it was indorsed on the note as a payment. Now as both the bank and the bankrupts knew of the insolvency of the latter, this was a payment by way of preference and therefore void by the thirty-fifth section of the Bankrupt Act. In this case as in the other, if they had stood on their right of set-off, it might possibly have been available, but when they treat it as the • bankrupts’ property, and endeavor to secure an illegal preference by getting the bankrupts to make a payment in the one case, and seizing it by execution in the other, when they knew of the insolvency, both appropriations are void.”
I discover no material difference between that case and the one at bar.
True, the amount of the check was indorsed on the note held by the bank “as a payment,” says’ the opinion; but in the instant case the amount of the check, while not indorsed on the old note of $18,-000 as a payment, was applied on the debt represented by such note in part payment, and a new note given for the balance; the old note being surrendered. True, no money was handled or actually passed from hand to hand, but a check representing so much money was executed by Cross and passed to the bank, which then credited the amount represented by the check on the debt represented by the note and.the account of Cross was charged the amount of such check.
This court, on the authority of Traders’ Bank v. Campbell, supra, would have no hesitation in sustaining the report and decision of the special master, and holding the transactions here a payment and recoverable preference and not a set-off, but for the later decision of the Supreme Court in Studley v. Boylston Bank, 229 U. S. 523, 527, 529, 33 Sup. Ct. 806, 57 L. Ed. 1313. In that case the facts were: (1) The Collver Company owed the bank $25,000, represented by five notes, of $5,000 each, maturing September 12, 20, and 30, and October 3 and 14. The balance of Collver Company in the bank fluctuated from almost nothing to $54,000. Large sums were deposited in August and September, and smaller sums in October and November. {2) During that period $22,500 was paid to the bank; the three notes maturing September 12, 20, and 30, being paid by checks on the deposit in the bank. The note due October 3 was charged to the company’s account, and on the same day a renewal note of $2,500 was ■discounted. The note which fell due October 14 was also charged to
The District Court held that the deposits had been made honestly and in due course of business, and that the bank, by virtue of its banker’s lien and right of set-off, could retain the money. This holding was affirmed by the Circuit Court of Appeals. 200 Fed. 249, 118 C. C. A. 435. The trustee then took the case to the Supreme Court, claiming that, if the charges by the bank to the account of the company were not transfers, hut the exercise of the right of set-off, the giving and acceptance of the three checks in payment of three of the notes certainly were, and that the bank necessarily knew it was receiving a preference. This claim was insisted on, notwithstanding the unreversed finding that the bank had no reasonable cause to believe that the payment of the notes would operate as a preference. The Supreme Court on this subject said, as to payment by the checks:
"But if, as found by the referee, the bank had no i-eaaonable cause to believe sucl> transfers would effect a preference, the payments by checks for $15,000 drown on the deposit account are as much protected as if on the same dates similar checks had been given in payment of like amounts duo another bank, with which the Collver Company kept no account, h’or there is nothing in the statute which deprives a bank, with whom an insolvent is doing business, of the rights of any other creditor taking money without reasonable cause to believe that a preference will result from the payment. The Bankruptcy Act contemplates that by remaining in business and at work an insolvent may become able to pay off Ms debts. It does not prevent him from continuing in trade, depositing money in bank, drawing; checks, and paying debts as they mature, either to his own bank or any other creditor. It does provide, however, that if bankruptcy ensues all payments thus made, within the four months period, may be recovered by the trustee, if the creditor had reasonable cause to believe that a preference would be thereby effected.”
This, of course, effectually disposed of the contention of the trustee that he could recover the payments made by check, if payments and transfers of property, within the meaning of the Bankruptcy Act; that is, of any claim to recover same as a mere preference. The unreversed finding was that the bank did not have reasonable cause to-
“We find nothing in the record to indicate that the deposits were made for the purpose of enabling the hank to secure a preference by the exercise^ of the right of set-off.”
The court then went on to discuss the nature of the right of set-off and then summarizes as follows:
“The bank was indebted to the Collver Company as a depositor some $54,000 for money deposited in good faith in the usual course of business and with no purpose of enabling the bank to secure the right of set-off. The Collver Company, on the other hand, was indebted to the bank $25,000 on notes maturing at various dates. These were mutual debts, and if, on the date the first note became due, the Collver Company had failed to pay it, the bank could have enforced its banker’s lien on its right of set-off, by applying $5,000 of the deposits in payment of the note which matured that day, and so on as each of the other notes became due. It cannot have been illegal for the parties on September 12, 20, and 30, and on October 3 and 14, to do what the law would have required the trustee to do in stating the account after the petition was filed on December 16, 1910. No money passed i'n either instance; for whether the checks for $5,000 were paid or notes for $5,000 were charged was, in either event, a book entry equivalent to the voluntary exercise by the parties of the right of set-off.”
It has not been found by the special master, and I do not see how it could be found, on the evidence in this case, that the deposits in the City Bank were made by the now bankrupt or received by the bank with any view of purpose of enabling the bank to secure or exercise the right of set-off. Hence, under the decision in the Studley Case, quoted from, it could not have been illegal (that is, the creation or payment of an illegal or recoverable preference) for the parties on the day the petition in bankruptcy was filed to voluntarily do what the law would have required the trustee to do after the petition was filed. Under the ruling of the Supreme Court it is not enough that the application of the Smaller debt owing by the bank to Cross was applied, by means of a check drawn by him and payable to the bank, and by it charged to the account of Cross, to the extinguishment so far as it would go of the larger debt of $18,000 owing by Cross to the bank. Even if we regard it as a payment, it was a payment to the bank of a fund deposited iri the bank subject to check, to which such bank was entitled, if not checked out to others, and on which it had what the opinion in the Studley Case calls a “banker’s lien.”
It cannot lie doubted that in the instant case the bank knew, when it requested or demanded the check-from Cross, that the receipt and credit on the note of the amount represented by it then on deposit would reduce the estate of Cross by that amount, and that the bank also knew that the receipt of the check and credit on the note of the amount represented thereby would operate as a preference, when considered as a payment by a debtor to a creditor only; both 'having knowledge of the insolvency. The bank had just completed an examination of the books of Cross and was aware of his insolvency; that is, that his property at a fair valuation would not pay his debts. The giving of the check and its application on the note operated to pay so much on the note and reduce the indebtedness of Cross to the bank by that amount, and so pay that amount in full. But the decision in Studlev, as Trustee, etc., v. Boylston Bank, supra, holds that a bank has a banker’s lien on its customers’ deposits in such bank, and under it the right to set off or apply the amount of such deposit, so far as necessary, against such due indebtedness as the customer owes the bank. If a bank, on discovering the insolvency of its customer and his inability to pay his creditors in full, loses its lien and this right of set-off — that is, its right to enforce its banker’s lien — then it can be held that requesting the customer to turn over- the deposit and receiving it by means of a check and applying it on the debt of the customer to the bank constitutes a preferential payment under the Bankruptcy Taw, but not otherwise.
If such deposits are made for the purpose described and received, with that understanding, we have a case where the money of the
Studley, Trustee, etc., v. Boylstan Nat. Bank, 229 U. S. 523, 33 Sup. Ct. 806, 57 L. Ed. 1313, holds that the Bankruptcy Act did not create the right of set-off, but recognizes its existence and provides a method for its enforcement even after bankruptcy. In that case it was found that the deposits and payment of notes were not made to enable the bank to secure a preference by the exercise of the right of set-off, but in due course of business. N. Y. Co. Nat. Bank v. Massey, 192 U. S. 138, 24 Sup. Ct. 199, 48 L. Ed. 380.
The special master has found in substance, and I think the finding justified and required, that the transaction, at the time the check was given between Cross and the bank, constituted and amounted to a payment on the note, and thus in substance is a finding that the giving and acceptance of the check was not the exercise of the right of set-off. Considering the two cases referred to, decided by the Supreme Court of the United States, in connection with all the facts of this case, T have reached the conclusion that the giving of the check by Cross to the bank, and the application thereof on the note as a payment, and the giving of a new note for the balance, constituted
As to the $621.61, the balance received by the bank for the flour, I am unable to find any justification for the retention of same and the application thereof on the old note for $18,000. There was no agreement, express or implied, which would authorize such retention and application of that balance on the note.
There will be an appropriate order accordingly.