204 F. 309 | D. Kan. | 1913
(after stating the facts as above).
This necessitates an examination of the voluminous evidence taken in the case, for -the purpose of determining whether the findings of facts made by the referee are clearly against the weight of the evidence, or whether some obvious error of law has intervened in the conclusions reached'. There is little conflict in the evidence, and the referee’s findings are practically based entirely on his views of the law applicable to the issues involved. In the argument before the court, counsel presented their views on the whole case, and treated the case, and -the court will treat it, as tried de novo, but giving the findings of facts made by the referee that weight to which they are entitled under the rule of law hereinbefore stated.
“It is certain, however, that a discharge, while releasing the bankrupt from a legal liability to pay a debt that was provable in the bankruptcy, leaves him Tinder a moral obligation that is sufficient to support that promise to pay the debt. And in reason, as well as by the great weight of authority, the date of the new promise is immaterial. The theory is that the discharge destroys the remedy, but not the indebtedness; that, generally speaking, it relates to the inception of the proceedings, and the transfer of the bankrupt’s estate for the benefit of creditors lakes effect at the same time; that the bankrupt becomes a free man from the time to which the discharge relates, and is as competent to bind himself .by a promise to pay' an antecedent obligation, which otherwise would not be actionable because of the discharge, as he is to enter into any new engagement. And so, under oilier bankrupt acts, it has been commonly bold that a promise to pay a provable debt, notwithstanding the discharge, is as effective, when made after the filing of the petition and before the discharge, as it made after the discharge.”
The facts in that case were that the defendant had been adjudicated a bankrupt; that subsequently lie offered a composition to his creditors, and the offer was accepted, and a composition made i|n said proceedings and duly confirmed by the District Court; that the plaintiffs? were then creditors of the bankrupt, and as such accepted the offer of composition and were paid a dividend thereon; that the claim sued on was a part of and was included in said claim on which the dividend was paid; that before the composition had been confirmed the defendant promised that, if plaintiff would lend him $500 for use in paying the consideration of the composition to his creditors in the bankruptcy proceedings, he would pay plaintiffs the balance of their claims in full. Plaintiffs accepted the offer and promise, loaned the bankrupt the moil-
Under the laws of Arkansas, as construed by the Supreme Court of that state, a mortgage on a stock of merchandise, with permission to the mortgagor to remain in possession and sell them without accounting therefor to the mortgagee, is absolutely void, regardless of the intention of the parties. Lund v. Fletcher, 39 Ark. 325, 43 Am. Rep. 270; Martin v. Ogden, 41 Ark. 186; Fink v. Ehrman, 44 Ark. 310; Gauss v. Doyle, 46 Ark. 122;. Collins v. Lightle, 50 Ark. 97, 6 S. W. 596; Stix v. Chaytor, 55 Ark. 116, 17 S. W. 707. On the other hand, it has also been held by the Supreme Court of Arkansas that a mortgage on a stock of merchandise, permitting the mortgagor to remain in possession, but requiring him to pay all moneys realized from the sale of the merchandise, less the expense of carrying on the business and the living expenses of the mortgagor, to the mortgagee, is valid. Adler-Goldman Com. Co. v. Phillips, 63 Ark. 40, 37 S. W. 297.
This leaves for determination the main question in issue — whether the evidence establishes fraud on the part of the Commission Company, in aiding the bankrupt to fraudulently obtain credit for the purchase of merchandise, whereby the Commission Company would finally be benefited in the collection of the indebtedness due it.
The voluminous correspondence between the parties, and the letters written by the Commission Company, it is claimed, establish conclusively that it was the intention of the Commission Company ‘‘to boost” the credit of the bankrupt, so as to enable him to procure, not only all of the merchandise he needed in his business, but as much more as possible, on credit. A careful reading of these letters does not satisfy the court that that was the intention of the Commission Company. They rather indicate that the Commission Company, having become a large creditor, was hopeful that a few profitable seasons would enable the bankrupt to pay his debts, and that its only chance to recover its money was by helping him along, assisting him with money, until good crops for a number of years in the section where the bankrupt was engaged in business, and good prices for the cotton, which is the staple crop raised in that section, would enable him to pay all of his debts, including that due the Commission Company. In almost every letter written by the Commission Company, it urges him to economize. It protests against his branching out and opening new 'stores, and insists upon a reduction of its indebtedness. In a letter dated March 22, 1909, the Commission Company wrote him:
"Try to fret out instead of deeper in debt. You will probably never have another year with as favorable crops as yon had this past year, and we think your account should show a considerable reduction; but if does not. We have always insisted upon you cutting down expenses, and doing less business on a safer and more profitable basis. Do business for profit, and not for show. * * * The difficulty is that you get in debt, to these other people, and then draw on us to pay them, which, of course, increases your indebtedness with us. Now, you must not expect us to do this; if you do, we are afraid you are to be disappointed. Because we have been your friends, and have not placed an iron rule on yon, ns the Memphis people claim they do, you should show your appreciation by trying to reduce your indebtedness to us. instead of riding us to death.”
In almost every letter he is urged to reduce his indebtedness and go less in debt to others. There is nothing in any of these letters to indicate an intention to aid the bankrupt to perpetrate a fraud on any one; but they seem to contain such advice as a creditor to whom a large sum of money is due, and whose experience in business is much greater than that of the debtor, would give. Come of the letters read as if written by a parent, interested in his son’s welfare. Nor is there any evidence whatever tending to show that the bankrupt purchased any goods, except such as were needed in his business; none of his property was fraudulently disposed of, nor any of his assets concealed by him. The most that can be said of this correspondence is that it is a circumstance which should be considered with other testimony, and thus may establish fraud.
It is claimed that other matters justifying the finding of fraud are the failure of the Commission Company to advise creditors of the bankrupt or merchants to whom the bankrupt had applied for credit, and who made inquiry of it as to his financial condition, the amount of his indebtedness to it, and in other instances making willfully false
“People are coming down liere to see us about you all of tlie time. We are doing all tliat we can to lielp you, by telling the truth about what we do tell.”
In the same letter he continues:
“As you know, we have always been opposed to your spreading out so much, and trying to do so much, especially since you have no capital to do it on. * * * Do not unload everything on us, as you have been doing in the past. That is not right and just for you or for us.”
The statement that “people are coming down here to see us about you all of the time” was evidently to stir him up, and was a mere figure of speech, as Mr. Allen in his evidence testified that only very few inquiries were made, and' the trustee has only been able to find three parties who made such inquiry, and one instance in 1903,. when the Dun Commercial Agency made inquiry of the Commission Company as to the bankrupt’s financial condition by showing the statement made by the bankrupt. One letter of inquiry was received in 1901 from the Bray Clothing Company, to which Mr. Allen replied:
•‘We do not think you would run any risk in filling this bill for Mr. Hawks; but you must be your own judge of credits, as we never profess to judge credits for other people, and we would rather you would use your own source of information, like we do, instead of referring to us.”
There is nothing to show that at that time he did not really believe this to be true, or that he believed Hawks to be insolvent at that time. The bill of the Bray Clothing Company, if credit was extended to the bankrupt upon the strength of this letter, was evidently paid promptly and this creditor is not complaining, nor is there any evidence that it was a creditor of the bankrupt at the time of the adjudication.
Another inquiry was made by W. M. Ball & Co. in 1909; and, while the answer thereto did not state the indebtedness due the Commission Company, it was evidently of such a nature as to cause Ball & Co. to decline taking the account of the bankrupt and extending to him the credit he desired.
The third inquiry was made by a Mr. Phillips, a representative of a concern selling gins; and, although he was not informed of the amount due the Commission Company, he declined to extend credit to the bankrupt. Nor was the statement to the Dun’s Commercial Agency in 1903 of such a nature as to justify a finding that it was knowingly false and made with the intention of deceiving any one. Hawks had made a statement to the Commercial Agency that his net worth was $40,000, and when inquiry was made of Mr. Allen he stated that he did not think Hawks was worth more than half that sum. There is no evidence to warrant the finding that Mr. Allen did not believe that statement to be true at the time he made it.
“Merchants and business men are not required to answer general letters of inquiry regarding the credit, promptness, and financial standing .of a named person, or to disclose their business relations or the state of their account with such persons.”
In fact, the evidence does not satisfy the court that Hawks did not at that time believe his statement to be true. It seems that he had a large amount of unsold cotton in the hands of the Commission Company at that time, and his indebtedness to it depended to a large extent on the price for which the cotton would sell, which price is always uncertain, as it depends upon the fluctuations of the market, which are, at times, quite violent.
Another important fact entitled to consideration is that none of the present creditors of the bankrupt ever inquired of the Commission Company as to the bankrupt’s financial standing or his indebtedness to the company. Although a number of credit men of these creditors testified in this case, none of them testified that such inquiry was ever made of the Commission Company. They seemed to rely solely upon the rating given by the mercantile agencies, which it is not claimed was based upon any information obtained from the Commission Company after 1903, and the further fact that Hawks paid his bills promptly by drawing his drafts on the Commission Company.
"The understanding that Terrell & Co., when required to do so, would give the plaintiff a mortgage on the goods in the Indian Territory, did not of itself render the mortgage fraudulent and void in law. As bona, fide creditors of Terrell & Co. they had the right at all times, independent of any previous understanding to that effect, to demand of Terrell & Co. such security for their debt, and Terrell & Co. had an undoubted right to give it. This being the unquestioned legal right of the parties, upon what principle can it be said to lie a legal fraud, or a badge of fraud, for the parties to stipulate for doing that which they would be perfectly free to do, and which would bo perfectly legal for them to do, independent of such stipulation? Why should a mortgage, which the creditor had a legal right to demand and the debtor a legal right to give, be held void because the debtor had previously agreed that such security would be given when demanded? There is no such rule of law. Tt is an everyday practice for debtors to promise to give their creditors security when demanded, and while such promise affords slight protection to the creditors, and cannot be specifically enforced, when it is voluntarily complied with, the security is not to become invalidated.”
“If a mortgage contains a general description sufficient to embrace the liability intended to be secured, and to put the person examining the record upon inquiry, and to direct him to the proper source for more minute and particular information of the amount of the incumbrance, it is all that fair-dealing and the authorities demand.” ..
The authorities relied upo,-n by counsel for trustee are: In re Rieger (D. C.) 157 Fed. 609; In re Friedman (D. C.) 164 Fed. 131; In re Kyte (D. C.) 182 Fed. 166. The facts in these cases differ so much from the case at bar that they have no application here. Upon the facts found in these cases, the conclusions reached were undoubtedly correct; and, were the facts in the instant case similar, this court would unhesitatingly follow them.
In the Rieger Case there was a partnership between the creditor and the bankrupt, and the court properly held that the corporation, being a partner, is not entitled to prove its claim.
In the Friedman Case the court found th'e facts to be that the bankrupt deliberately started out to conceal his insolvency, which he knew to be a fact at the time, and to obtain goods from wholesale houses without intending to pay for same; that he bought goods on credit where-ever he could obtain them, in quantities largely in excess of what he could dispose of in his business; that he sold a great many of them at wholesale; that no entries were made on the books, nor was the money paid over to the cashier, but was fraudulently appropriated by him; that some of the goods were never taken to the store of the bankrupt, but were carried in their original packages to the parties who filed these claims against the bankrupt; that according, to the books there should have been on hand $81,000 worth of merchandise when he was adjudicated a bankrupt, but instead there was only $38,000 worth on hand, and no explanation was made of this deficit; that during the last six months of his business he purchased $69,000 worth of goods, while for the entire previous year he only purchased $50,000 worth; that the money, which it was claimed he had borrowed from these creditors, all of whom were his relatives or intimate friends, never reached the bankrupt’s business, and the bankrupt was unable to give any explanation of that fact; that the creditors had been intimate associates with the bankrupt for many years; that when he started into business he was doing so on borrowed capital, as was well known to them, and when they made these loains they were doing business largely on borrowed capital; that they made the loans without security, although they knew that he was insolvent; that to secure the money to make these loans they hypothecated insurance policies, and one of the creditors mortgaged his homestead for the purpose of making the loan; that when the goods were sold by the trustee they were purchased by a brother-im-law of the bankrupt for the benefit of the bankrupt and these claimants. The evidence in that case conclu
Ln the case at bar none of these facts existed. The bankrupt made no purchases of goods, except as they were needed in his several stores. No moneys were misappropriated by him. None of the goods bought were sold in any other than the usual manner. None of his assets are shown to have been concealed. None of the officers of the Commission Company were in any wise related to the bankrupt, or on such terms of intimacy as to arouse even a suspicion of a desire to aid him in the perpetration of a fraud. The Commission Company is financially one of the strongest mercantile corporations in the city of St. Louis. Not the slightest suspicion is cast by any of the voluminous testimony in the case upon its integrity or standing in the commercial world. The only charge that is established by the evidence is that it displayed poor business judgment in permitting its claim to become so large, instead of closing the matter up and making the loss before the debt had grown to these enormous proportions. As it is, its loss now will he mtich greater than if it had lost its entire debt at any time prior to 1906.
In the Kyte Case the bankrupt owned a building subject to a mechanic’s lien amounting to over $2,000. The lien claimants were indebted to him in the sum of nearly $1,800. His two sons, who clerked for him and knew his financial extremity, a few days before the execution of an assignment for the benefit of his creditors, purchased the mechanic’s lien, and with this money the lien claimants paid the bankrupt the back accounts. They failed to show how they obtained the money to purchase these claims, and it was a reasonable presumption that il had been furnished by their father, the bankrupt, as they had no means of their own. Upon these facts the court properly held that these liens were not valid in the hands of his sons as against the claims of the general creditors.
From a careful examination of the entire evidence, the court is of the opinion that the findings of the referee were reached from erroneous conclusions of law applicable to a case of this nature, and that the evidence does not justify a finding that the Commission Company was guilty of any conspiracy or any fraud which would warrant the court to refuse the allowance of its claim, or postpone it until after the other creditors have been paid, which would, in effect, be the same as a dis-allowance.
The order of the referee disallowing the claim will be set aside, with directions to allow the claim as an unsecured claim, after deducting therefrom the money realized from the sale of the real estate covered by the mortgage of 1909. now in the registry of the court, and that it is entitled to the money realized from the sale of the mortgaged premises, that being a preferred claim.