Case ID: ad_118/html/0288-01.html
Source: Caselaw Access Project
Author: {"author": "Scott, J.: Ingraham, J. (dissenting):", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Robert G. Perry, as Trustee in Bankruptcy of Broadway Trimmed Hat Company, a Bankrupt, Appellant, v. Van Norden Trust Company, Respondent.
    First Department,
    March 22, 1907-,
    Bankruptcy — unlawful preference by corporation — Stock Corporation Law, section 48, construed —facts showing unlawful preference — bills and notes indorser not discharged when payment by" maker is unlawful preference.
    To constitute an unlawful preference by ah insolvent corporation under section 48 of the Stock Corporation Law, it is only, necessary that the corporation shall Le insolvent or its insolvency imminent and that the payment shall' have been made or the security given with the intent on the part of the debtor to-' give a preference. The intent of the creditor or his knowledge as to the insolvency of the debtor or'the intent of th.e debtor is immaterial. If, however, the creditor parts with a valuable consideration and is without notice of , the insolvency or it.s imminence, he stands in the position of a purchaser for value without notice, and the transaction- is not avoided.
    It is not necessary to .uncover the “ mind” of an insolvent corporation in. order -to ascertain its intent, and when, being insolvent, it gives all its assets to one creditor, leaving claims amounting to $10,000 entirely unprovided for, the-facts show an intent to give an unlawful preference.
    If a creditor holding security innocently and in the due course of business accepts -payment from the insolvent corporation -and surrenders security to which it cannot he restored, the payment is not preferential or contrary to the Statute. . If, however, no security is surrendered the rule does not apply. There is no surrender of security by the payment of a note indorsed by a third ■ person, because,' recourse against tjie indorser is not lost if the creditor be ■ required to repay.
    Ordinarily payment of a note by the maker terminates the liability of the indorser, hut the receipt of a preferential payment of an indorsed note contrary to tlie statute is'in contemplation of law no payment and the indorser is hot released. '
    Á business corporation liable on four promissory notes indorsed by a third person, and held by the defendant trust company and bung insolvent, sold all its property and deposited $1,000 with tile defendant at the same time borrowing $3,000 which it credited on its deposit account and secured by an assignment .of -its outstanding accounts. The insolvent corp: ration thereupon drew its check for its total deposit and gave it to the defendant in payment of the unmatured notes leaving itself without .assets to meet tiro claims' of other . creditors. On all the evidence.
    
      Held, that the transaction was an unlawful preference obnoxious to the statute.
    Ingraham and McLaughlin, JJ., dissented, with opinion.
    
      Appeal by the plaintiff, Robert G. Perry, as trustee, etc., from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of New York on the 20th day of July, 1906, upon the decision of the court, rendered alter a trial at the New York Special Term, dismissing the complaint upon the merits.
    
      J. G. Engel, for the appellant.
    
      Edward W. S. Johnston, for the respondent.
   Scott, J.:

In the year 1904 the Broadway Trimmed Hat Company, a domestic stock corporation, had a deposit account with the defendant trust company, and at various times obtained from that company loans represented by promissory notes and secured by the assignment of outstanding accounts. On May 23, 1904," the trust company held two promissory notes of the trimmed hat company, one dated February 17, 1904, for $2,100, payable on demand, and secured by the assignment of outstanding accounts, and the other dated May 12, 1904, for $4,600, payable on demand, and also secured by the assignment of outstanding accounts. On these assigned accounts the defendant has collected $857.45 more than the amount, with interest, due on the notes. On the same date the defendant held three other promissory notes of the trimmed hat company dated respectively February 1, 1904, March 7, 1904, and April 28, 1904, the first two being for $500 each and the third for $3,000, each being payable four months after its date, rand all being indorsed by one Max Feist. For these notes the defendant held no security save such as was implied by. the indorsement of Max Feist. On said May 23, 1904, the Broadway Trimmed Hat Company sold out all its merchandise and fixtures. On the following day, May 24,'1904, it deposited the sum of $1,000 in the defendant trust company and borrowed from said company the sum of $3,000, which was credited on its deposit account with said trust company and as security for which the trimmed hat company assigned to the trust company all of its outstanding accounts not theretofore assigned, as well as the equity in the accounts which had theretofore been assigned as security for the loans of February seventeenth and May twelfth. The trimmed hat company thereupon drew a check upon said trust company for $4,000, which it delivered to the trust company in payment of the unsecured and unmatured notes of February first, March seventh and April twenty-eighth. By these transactions the Broadway Trimmed Flat Company denuded itself of practically all its assets, leaving nothing to meet the claims of the other creditors which aggregated- about $10,000. On May twenty-fourth a' petition in bankruptcy was' filed against the Broadway Trimmed Flat Company, and in due course the plaintiff was appointed its trustee in bankruptcy. . This action is brought under section 48 of the Stock Corporation Law (Laws of 1892, chap. 688, as atnd. by Laws of 1901, chap. 354) to recover the amount paid to defendant on May 24, 1904, as a preferential payment. This section, so far as material to this action, reads as follows: “ Wo conveyance, assignment or transfer of any property of any such corporation by it, or by any officer, director or stockholder thereof, nor any payment made, judgment suffered, lien created or security given by it, or by any officer, director or stockholder when the corporation is insolvent or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporation, shall be valid * * *. Every person receiving by means of any such prohibited act or deed any property of the corporation shall be bound to account therefor to its creditors or stockholders or other trustees. *■ * * Every transferor assignment or other act done in violation of the foregoing provisions of this section shall be void. * • * * Wo such conveyance, assignment or transfer shall be void in the hands of a purchaser for a valuable'consideration without notice.”

The terms of the act are very simple. All that is necessary in order that it shall become operative is that the corporation shall be insolvent, or its insolvency imminent, and that the payment shall have been made or the security given with the intent on the part of the debtor to give a preference. • The intent of the creditor, or his. knowledge as to the insolvency of the debtor or of the intent of the debtor is immaterial. If, however, the creditor parts with valuable- consideration, and is without notice of the insolvency or its imminence, he stands in the position of a purchaser for value and without notice, and the transaction is not avoided. That the Broadway Trimmed Hat Company was insolvent on May 24, 1904, is indisputable, and there can be no doubt whatever that when it gave all its assets to one creditor, leaving claims amounting to $10,000 entirely unprovided for, it meant to prefer the creditor to whom the assets were given. It is not necessary to uncover the mind of a debtor in order to ascertain his intent, when the natural, probable and indeed inevitable consequence of his acts is to effect a preference.

The transaction of May 24, 1904, between the trimmed hat company and the defendant cannot be treated or considered otherwise than as a device to give to defendant, under the guise of a new loan, security for the unsecured loan represented by the unmatured notes. The pretended loan of $3,000; the crediting of that amount on the deposit account of the trimmed hat company, and the immediate payment of the amount to defendant as payment of the unsecured notes was obviously a mere bookkeeping device. The net result was that for its claim of $4,000 represented by the three unsecured notes, the defendant received a cash payment of $1,000, and an assignment of accounts, leaving its claim only $3,000 now represented by a single note. The case must be considered as if, on May twenty-fourth, the trimmed hat company had paid $1,000 in cash on account of its $4,000 debt and had assigned the accounts as security for the balance of $3,000. In this view the case would be a simple one, and the plaintiff’s right to a judgment perfectly clear, but for the fact that the notes for $4,000 taken up on May 24, 1904, bore the indorsement of Max Feist, conceded upon the trial to have been perfectly solvent and responsible.

If a creditor, holding security, innocently and apparently in the due course of business, accepts payment even from an insolvent corporation, and thereupon surrenders his security to which he cannot be restored, the payment cannot be said to be preferential and contrary to the statute, because the creditor has received tlie payment in good faith and upon a valuable consideration. If, however, the creditor has surrendered no security the rule does not apply. The only security the trust company held was the indorsement of Max Feist, and that security it. will not have lost even if it now he required to return to the trustee the money, and the accounts or the proceeds of the accounts, which were assigned to it on May 24, 1904.- .

Ordinarily,, of course, the payment of a note by the maker terminates the liability of the indorser, but the receipt of a preferential payment, contrary to the statute, of an indorsed note, is in. the contemplation of law.no payment at all, and does not release the' indorser. (Swarts v. Fourth Nat. Bank, 117 Fed. Rep. 1; Petty v. Cooke, L. R. 6 Q. B. 790-796; Brandt Suretyship [3d ed.], § 368; Williams v. Gilchrist, 11 N. H. 535; Watson v. Poague, 42 Iowa, 582.) The defendant trust company, in surrendering the notes indorsed by Feist, did not discharge him, but retained whatever right of recourse it then had against him. So far as he was concerned, its position remained' unaltered and the debt remained unpaid, and it does not appear that the defendant has in any way lost its right of recourse against Feist, the indorser. If it appeared, as it does not in the case as presented to us, that the defendant, believing in good faith that its claim had been discharged by pay- • ment, and acting upon that belief, had hy act or omission effectually discharged the indorser a different question might be presented, which, however, it is not necessary to consider at present. We are, therefore, of the opinion that upon the evidence the payment to the. defendant trust .company of $1,000 on May 24,1904, and the assignment to it on that day of the accounts until then unassigned, and of. the equity in the accounts previously assigned was. preferential, contrary to the statute and void, and that the- plaintiff- is entitled to recover the $1,000 and whatever may have been collected upon, the accounts and the equities attempted to be assigned, and a reassignment of so many thereof as have not.-been collected.

The judgment should be reversed and a -new trial granted, with' costs to. appellant to abide the event.

Patterson, P. J., and Clarke, J., concurred; Ingraham . and McLaughlin, JJ., dissented.

Ingraham, J. (dissenting):

The only indebtedness that existed in favor of the defendant against the Broadway Trimmed Hat Company was that evidenced by three promissory notes made by the corporation to the order of itself and indorsed by one Max Feist. These notes had been discounted by the defendant aud belonged to it. It was conceded upon the trial, and the court found, that the indorser was solvent, and the bank could have collected the note from him if it had not been delivered by the defendant to the maker. This being the situation, the corporation, having oh deposit with the defendant a sum of money exceeding the amount of these" notes, paid to the defendant the amount thereof, although not yet due, and obtained a delivery of the notes from the defendant. It subsequently appeared that this corporation was insolvent, but it is not alleged that the defendant had any knowledge or reason to suppose that it was insolvent or had notice of any fact to put it upon inquiry. It held these notes, indorsed by a perfectly'solvent indorser, and it had a right to dispose of them to any one that it pleased. At the request of the maker of the notes it transferred them to it and received the value thereof. Upon the trial the plaintiff conceded, and the court found, that the defendant acted in good faith in its transactions with the Broadway Trimmed Hat Company; that the defendant did not at any of the times mentioned have any knowledge or notice of any intent on the part of the Broadway Trimmed Hat Company, or its officers, .to give to this defendant a preference over other creditors of the said company ; that the defendant did not at any of the times mentioned have any intent oii its part to acquire a preference over other creditors of the Broadway Trimmed Hat Company, and that neither said company nor its officers had any intent in any of its transactions with tins defendant to create thereby a preference to this defendant over other creditors of the said Broadway Trimmed Hat Company; and that no transaction had by said company wdth this defendant did, in fact, create any preference to the defendant over other creditors of the Broadway Trimmed Hat Company.

I think that these findings are sustained by the evidence. What the defendant had and what it was entitled to retain was the obligations of the Broadway Trimmed Hat Company, secured by the indorsement on the. notes. It had a q>erfect right to sell those obligations ; and a sale of the instruments, either to the maker of the notes, to the indorser, or to a third party, was not a mere payment of the indebtedness, but was a transfer of the obligations, including the liability of the maker of the notes and the indorser. A transfer of that paper to the maker, with the indorsement • intact and the indorser liable for the payment of the notes when due, transferred the right of the defendant to collect the notes. I cannot see that there is any difference between a transfer of the obligation of an indorser upon a promissory note and the transfer of any other property held by a creditor to secure the payment of an indebtedness. ",

It is suggested that, notwithstanding this, transfer, the -defendant, upon the payment of the amount received by it from the corporation to the trustee in bankruptcy, would have the right to enforce the obligation of. the indorser; .but the obligation of the indorser necessarily depends, upon .the notes being presented for payment when due, and notice of non-payment thereof to the indorser ; and if these notes were never presented for payment, or notice of non payment giv.en to the indorser, I cannot see how the indorser can be held liable. By the defendant’s surrendering the notes to the maker, it parted with all interest iri the notes and put it out of its power to hold the indorser liable, and, so far as appears, the notes never were presented for payment when they became due. so as to hold the indorser. To treat this transfer of au existing valid obligation which the bank could enforce as a simple preference, void under the statute, without requiring the corporation or the trustee succeeding to its right to restore to the defendant the notes which it delivered to the corporation upon the payment, of the money, with the liability of the indorser intact, would be, it seems to me, a 'violation of settled legal principles. The' action is in equity to enforce a liability, designed to prevent the payment of favored creditors by a-corporation. It seems to me that this statute is not applicable where the substantial transaction is not solely the preference of a debt due by a corporation, but involves a transfer by a creditor of property or security which it held to secure the payment of the indebtedness, and where the creditor acts in entire good faith without any notice of the insolvency of the debtor or of ' any intent on its part to create a preference.

It has been assumed that the intent, of the creditor, or any knowledge or information sufficient to put the creditor upon inquiry as to the solvency of the debtor, or as to the intent with which á payment was made, is entirely immaterial; that all that has to be proved to entitle a trustee or receiver of a corporation to recover is an undisclosed intent on the part of the "debtor corporation to prefer one creditor over others. The statute provides that “no * * * payment made * * * by it (a corporation), or by any officer, director or stockholder when the corporation is insolvent or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporation, shall be valid.” If the question were an open one, I should have considerable doubt as to whether the intent to give a preference to a particular creditor must not be an intent in which both the party making the payment and the party receiving the payment participated. A corporation transacting business, apparently solvent and in good credit, giving and receiving credit and paying its debts in usual course as they become due, may still be insolvent, although its condition be concealed from its creditors and others transacting business with it. It does not seem that it could have been the intent of this statute to justify a recovery from creditors whose debts have been paid, upon.proof that the corporation was insolvent and that its officers making the payment knew that it was insolvent, and from that adduce the inference that they or the corporation intended to create a preference. If this construction of the law is correct, years after a payment has been made by a corporation to a creditor, a trustee in bankruptcy or a receiver can recover back the money actually paid in satisfaction of an existing debt, merely because of an undisclosed intent of an officer of the corporation making the payment, when the money was received by the creditor in good faith in payment of the corporation’s conceded indebtedness to it. But certainly, where it appears that the transaction was not solely the payment of a debt, but obtaining from a creditor the security which the creditor held for the payment of a debt, a finding that no preference was intended within the statute should be sustained.

I think, therefore, that this judgment should be affirmed.

McLaughlin, J., concurred.

Judgment reversed, new trial ordered, costs to appellant to abide event.