No. 175 | 2d Cir. | Apr 13, 1921
John M. Cross was adjudicated a bank-
rupt on the 14th of October, 1916, and a trustee of his estate was appointed. He filed a petition in the District Court, praying for an order or decree directing the City Bank o‘f Syracuse to pay over to the trustee certain moneys alleged to have been received and retained by the bank under circumstances which hei claimed amounted to an unlawful preference. An answer was filed by the bank and the issues were referred to a special master. He reported that the trustee was entitled to recover from the bank the s.um of $2,755.24, being the amount on deposit to the credit of the bankrupt on the books of the bank on the 25th of October, 1916; also the sum of $622.61, being the amount of surplus arising from the sale of 205 barrels of flour pledged by the bankrupt to the bank as collateral security for the payment of a note of $1,261.39, made on the 26th of September, 1916. The master’s conclusions were approved by the District Judge, and it is from a decree entered thereon that this appeal is taken.
On April 15, 1916, the bankrupt, with one partner, was engaged in the wholesale grocery business in the city of Syracuse, and borrowed money from the City Bank of Syracuse to the extent of $18,000, giving their promissory note therefor, payable on demand, and as collateral security therefor gave an assignment of all their accounts receivable. By agreement between the copartnership and the bank it was agreed that the copartnership would collect the assigned accounts and deposit the proceeds in the bank to the credit of the partnership, and be privileged to draw against the same by check, but for purposes of the' business only. Daily assignments to the bank of all new accounts receivable were made in place of those collected and deposited, and thus the borrower kept the security for the loan unimpaired. In April, 1916, the firm was dissolved, and the bankrupt continued in business alone and in his own name. The agreement referred to between the bank and the copartnership continued. Between the period of April, 1916, when the bankrupt continued in business alone, and October 25, 1916, daily assignments to the bank of the new accounts receivable were made, and old accounts were collected, and moneys were paid from the bank account in the regular course of business. '" The demand note of $18,000 had not been paid. The bank held assigned accounts to an amount aggregating $24,000, and on the day of his adjudication in bankruptcy, there was on deposit $2,755.24. The District Judge upheld the validity of the original agreement between the co-partnership and the bank, and it was directed that $13,555.63 collected from the accounts receivable of the bankrupt, which were assigned as collateral for the payment of said note, was the property of the bank.
One week before the filing of the petition, the bank, after an examination of the bankrupt’s books, gave notice to the debtors of the bank - rupt that it was the owner of the accounts and that the same should be paid to the bank and not to Cross. On the day the petition in bankruptcy was filed, the bank credited up on the bankrupt’s $18,000 demand note the amount of the balance of $2,755.24, and charged the same to Cross’ account. Later on the same day the bankrupt gave a check for the amount and delivered it to the bank, together with a new demand note for the difference between this sum' and the amount of the demand note, to wit, $15,226.76. This was done for the purpose of obtaining the benefit of the bank’s right of a set-off of mutual debts and credits under section 68 of the Bankruptcy Act. It was held below that, even though such right to a set-off existed between the bank and the bankrupt, and it was conceded that such set-off was permissible under the Bankruptcy Act, still, because of what took place by giving the new note, and because of the agreement existing between the bank and the bankrupt, no such right of set-off existed as against the general creditors of the bankrupt o-r against the trustee.
Another transaction is the subject of review on this appeal. The bankrupt borrowed from the bank $1,261.31 on a demand note on September 25, 1916, and pledged as collateral security a warehouse receipt for 205,barrels of flour. The proceeds of this loan were remitted to a milling company in Minneapolis, which shipped the flour to the bankrupt with a sight draft attached to the bill of lading, and sent it to the City Bank of Syracuse for collection. The bank sold the flour on October 16, 1916, and after paying the note had a surplus of $621.61, which it applied to the bankrupt’s demand note of $15,226.76. It contends that it was entitled so to do by virtue of section 68 of the Bankruptcy Act. The court below held against this contention, and said that such sum must be paid to the trustee. Section 68 of the. Bankruptcy Act (Comp. St. § 9652) provides as follows:
“a. In all eases 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 ibe other, and the balance only shall be allowed or paid.
“b. A set-off or counterclaim shall not be 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 witil knowledge or notice that such bankrupt was insolvent, or had committed an act of bankruptcy.”
“Q. Was there any limitation agreed upon or understood between you and the bank upon your cheeking power on that account? Were you confined in other words to checks in payment for business indebtedness or were you at liberty to give any cheeks you pleased? A. There was no definition made at the time. We assumed it was for business cheeks, or checks to pay bills of business requirements.
“Q. That is, if you wanted to. meet a pay roll connected with the business? A. We always issued a check for the pay roll; our salary was agreed upon, and we had our check for our salary, the same as the other help.
“Q. As a business expenditure? A. Yes.
“Q. There was nothing said, however, imposing any other limitation upon the use of that account? A. No.
“Q. What, in fact, was your practice did you draw for other purposes? A. For business purposes only.”
There is no evidence which would permit a construction that the deposit was a special deposit, or a trust fund for the benefit of creditors. The relationship thus created, made in good faith and in the ordinary course of business, is no obstacle to the bank’s right to insist upon its lien and right of set-off as provided in the bankruptcy statute. In Continental Trust Co. v. Chicago Title Co., 229 U.S. 435" court="SCOTUS" date_filed="1913-06-10" href="https://app.midpage.ai/document/continental--commercial-trust--savings-bank-v-chicago-title--trust-co-97933?utm_source=webapp" opinion_id="97933">229 U. S. 435, 33 Sup. Ct. 829, 57 L. Ed. 1268, the bank agreed with its depositor, after knowledge of his insolvency, that if he would make deposits for such pur
“As to tlie §575.7!), we think the right to sot off this deposit, is established by the principles laid down in New York Comity National Bank v. Massey, supra. Here there was a deposit subject to be checked out by the bankrupt for specific purposes. The money was not placed in the bank with a view* to giving it a benefit, except indirectly, because of the deposit. It was subject to Prince’s check, and all of it might have been cheeked out for the purposes intended.”
We think the same principle has application to the facts disclosed by this record.
The decree is reversed.