Case ID: ad_74/html/0089-01.html
Source: Caselaw Access Project
Author: {"author": "Jenks, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

James Z. Pearsall, as Trustee in Bankruptcy of Walter L. Johnson, Respondent, v. Nassau National Bank of Brooklyn, Appellant, Impleaded with Margaret M. Johnson.
    
      Promissory note — right of a bank to apply a deposit in payment thereof— effect of an assignment for creditor's by the debtor before the maturity of the note, invalidated by a proceeding in bankruptcy — what proof of knowledge by the creditor i& necessary to avoid a preference.
    
    A bank which discounts a note for a depositor has, in the absence of an express, agreement to that effect, no authority prior to the maturity of the note to apply the amount of his deposit to the payment of the note.
    Consequently where the depositor makes a general assignment for the benefit of creditors prior to the maturity of the note, which assignment is invalidated by . an adjudication in bankruptcy made .in proceedings instituted against the-depositor after the maturity of the note, and a week after the making of the assignment, the trustee in bankruptcy is entitled to recover the deposit from the bank, as there was no time after the maturity of the note when the title to-the deposit was in the depositor.
    Sections 63 and 68 of the Bankruptcy Law must be interpreted as applicable to the proceedings in bankruptcy and to the incidental proof and allowance of claims, and not as intended to change the principles of setoff in actions.
    In order to render a preference voidable within section 60 of the Bankruptcy Law it is necessary inter alla to establish that there was reasonable cause on the-part of the creditor to believe that a preference was intended.
    What evidence given in an action, brought by the receiver in bankruptcy of a. man engaged in the real estate business, to set aside a conveyance of real property made by the bankrupt to his wife through the medium of a third person in payment for money loaned to him by her, is insufficient to establish that, the wife had reasonable.cause to know or believe that a preference was intended» considered.
    Appeal by the defendant, the Nassau National Bank of Brooklyn, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Kings on the 21st day of January, 1902, upon the decision of the court, rendered after a trial at the Kings County Special Term.
    This action is brought by the trustee in bankruptcy of Mr. Johnson to recover $680 and $1,424 from a bank. Mr. Johnson-and his. wife were separate depositors therein. The bank had discounted for Mr. Johnson, and held, two promissory notes made by Mrs. Johnson to her own order, for the accommodation of her husband* indorsed by her and by her husband, for $1,600 and $500, which fell due on May 29 and June 16, 1900, respectively. On May 28, 1900, Mr. Johnson’s balance was $680. .On that day he executed and delivered a general assignment to Mr. Cooke, which was filed by the assignee on May twenty-ninth. When the note for $1,600 fell due, it went to protest. Thereupon the bank charged it against the account of Mr. Johnson, applied thereto his said balance of $680, and then charged him with an overdraft of $920. By proceedings instituted June 5, 1900, Mr.. Johnson was adjudged, a bankrupt, and the plaintiff was appointed his trustee on August 3, 1900. On June sixteenth, the note for $500 was presented for payment, but was not paid. Mrs. Johnson had received in April, 1900, about $12,000 on an insurance policy, which sum she lent to her husband. On May 3, 1900, Mr. Johnson, by.an exchange, had -conveyed certain realty, of which he was the owper, to Mr. Dickinson, and Mr. Dickinson had conveyed to Mrs. Johnson premises in Forty-seventh street, which were subsequently mortgaged (on May fifth) for $1,800. This $1,800 was used by Mr, Johnson in his business. On June 22, 1900, Mrs. Johnson conveyed the Forty-seventh street property to Mr. McDonald,.cashier of the defendant, for $1,200, which, with $300, was deposited by her in the defendant bank. Thereupon, Mrs. Johnson delivered to Mr. McDonald two checks dated that day for $501 and $920,.which the bank paid intpMr. Johnson’s account; Mr. Johnson, .at. the request of..Mr. McDonald, made his own check, whereby he directed the bank .to pay outof his account the sum of $1,601 to the order of the “ Note, Nassau Natl. Bank,” and thereupon the notes were paid out of Mr. Johnson’s account, were delivered up and were destroyed; The •Special Term decided that on May 28, 1900, the bank was indebted to Mr. Johnson in the sum of $680 ; that upon the delivery of the assignment to Mr. Cooke, he became vested with the title thereto-; that when Mr. Johnson was adjudged a bankrupt the title to .the deposit immediately vested in the plaintiff as trustee; that the conveyance to Mrs. Johnson of the Forty-seventh street property was an unlawful preference which was null and void; that the trustee was entitled to recover, the proceeds of the. sale to Mr. McDonald as the payment of the notes out of the proceeds was an unlawful preference, and gave judgment for the plaintiff, .from which judgment the. defendant bank appeals.
    
      
      Lemuel II. Arnold, for the appellant.
    
      E. G. Bullard and Theodore D. Tomlinson, Jr., for the respondent.
   Jenks, J.:

The bank had no lieu upon the deposits of Mr. Johnson for the payment of the note before the maturity thereof, for the reason stated in Jordan v. National Shoe & Leather Bank (74 N. Y. 467), that such right does not arise from mere possession, but from contract or operation of law, and where . there is no contract the law does not imply one until after the note falls due, remains unpaid and no other rights have intervened. Before the note fell due Mr. Johnson had made and delivered the assignment. As Mr. Johnson had the right to draw out his balance at any time before the note fell due, inasmuch as the bank then had no lien upon it, that right passed to the assignee previous to the maturity of the note, so that when the bank attempted to enforce the lien it dealt not with its debt to the depositor, but with his assignee. (See, too, Coffin v. McLean, 80 N. Y. 560, 563.) In Beckwith v. Union Bank of New York (9 N. Y. 211) an insolvent firm with money on deposit in a bank made a general assignment. Thereafter, but before notice of the assignment to the bank, a bill against the firm held by the bank, larger than the deposit, fell due and was charged up by the bank against the account. The court held that the bank had no lien which would have prevented the assignors from drawing out their deposit before the maturity of the bill, that the right passed to the assignees, and that no notice was necessary to perfect that right except that only in default of notice the bank might have so dealt by its subsequent acts as to have affected his rights. (See, too, Lawrence v. Congregational Church, 32 App. Div. 489 ; affd., 164 N. Y. 115.) In Coates v. First National Bank of Emporia (91 N. Y. 20, 27) it is said that the only object of notice is to guard the debtor against dealings with the assignor in the belief that he still owned the debt. The learned counsel for the appellant contends that the plaintiff as trustee. in bankruptcy took the property as though no assignment had been made, and subject to all lawful liens upon it for the reason that the bankruptcy proceedings avoided the assignment, and that the title of the assignee is as of the date when the adjudication of bankruptcy was made, and cites MacDonald v. Moore (1 Abb. N. C. 53), decided by Blatchford, J., in United States District Court, southern district of Now York. It is to be noted that in Thrasher v. Bentley (59 N. Y. 649), more fully reported in 1 Abbott’s New Cases, at page 39, the Court of Appeals, where the point was made that a general assignment was void under the Bankrupt Act, and that the assignee took no title, said : “ We do not discover in the facts of this case anything which shows that this assignment is in hostility to the Bankrupt Act, and, therefore, void. There is no preference created by it in favor of any creditor. On the contrary, it piro vides in terms for the payment of all his creditors in full; and if that may not be, then ratably and in proportion. There is no intimation that the debtor (Syme) has ever been proceeded against or taken proceedings in the bankrupt court. We do not find in the Bankrupt Act any piro vision which makes an assignment of such kind, by a debtor not made a bankrupt, an instrument voider se. On the contrary, there are authorities that such an assignment is not void. It was so held in Sedgwick v. Place (1 Bank. Reg. 204, by Nelson, J.); and on Hawkins's Appeal, in the Supreme Court of Connecticut (see 34 Conn. 548).” (See, too, Syracuse, Binghamton & New York R. R. Co. v. Collins, 57 N. Y. 641; Haas v. O'Brien, 66 id. 597 ; Wilson v. Nelson, 183 U. S. 191.)

.Mr. Collier, in his work on Bankruptcy, says that such an assignment is voidable and not void, and is good except in proceedings instituted in bankruptcy. (3d ed. pp.41,42, citing many authorities.) Moreover, the present act differs from the act as it existed when MacDonald v. Moore (supra) was decided, in that it provides that all property assigned within four months prior to the filing-of the pietition, with intent to hinder delay and defraud creditors, shall be and remain a pmrt of the assets and estate of the bankrupt, and shall ptass to the trustee, whose duty it shall be to recover and to reclaim the same by legal proceedings or otherwise for the benefit of the creditors. The assignment in the case at bar was not set aside’, but was invalidated by the bankruptcy proceedings. I think, then, that before the defendant had any right to exercise a lien, the title to the deposit vested in the assignee, and that when the assignment was invalidated by the bankruptcy proceedings, the title of the assignee passed to the trustee, and that there was no interval after the assignee acquired title, and before the trustee took title, during which the title was in Mr. Johnson, so that at or upon the maturity of the note the bank could enforce a lien thereupon as against his property.

The learned counsel for the appellant contends that under the Bankruptcy Act the right of setoff existed from the time the notes were discounted, citing sections 63 and 68 of the act (30 U. S. Stat. at Large, 562, 565). He points out that section 68, to quote his language, “ provides that 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 off against the other, and the balance only shall be allowed or paid,” and that section 63, also quoting the counsel’s language, provides that “the ‘debts’ of a bankrupt which may be proved and allowed against his estate are a fixed liability as evidenced' by judgment or an instrument in writing absolutely owing at the time of the filing of the petition against him, whether then payable or not,” and hence he contends that the bank had the right of setoff even if the notes had not fallen due before the bankruptcy proceedings were commenced. I think that those provisions must be interpreted as applicable to the proceedings in bankruptcy and to the incidental proof and allowance of claims, but not as intended to change the principles of setoff in actions. (Munger v. Albany City National Bank, 85 N. Y. 580, 588, citing Sawyer v. Hoag, 17 Wall. 610.) When the plaintiff was declared a bankrupt, there was no mutual debt or mutual credit as between him and the bank, for the reason that he had, before even the filing of the petition, parted with his title to the assignee for the benefit of his creditors, and the claim in effect was that of the creditors as against the bank.

In order to render a preference voidable within section 60 of the Bankruptcy Law (sufra, 562), it is necessary, inter alla, to establish that there was reasonable cause on the part of the creditor to believe that a preference was intended. (Sebring v. Wellington, 63 App. Div. 498.) In Matter of Eggert (4 Am. Bank. Rep. 449) Jenkins, O. J., after a review of many authorities, pertinently says: “ The creditor is not to be charged with 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; * * * it is not essential that the creditor should have actual knowledge of or belief in his debtor’s insolvency, but that he should have reasonable cause to believe his debtor to be insolvent; * * * if facts and circumstances with respect to the debtor’s financial 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.”

Mr. Collier, in his work on Bankruptcy (3d ed. p. 343), says: “ The present statute does' not make any preferences voidable unless the transferee had reasonable cause at the time of the transfer to believe that a preference was intended. It is to be noted that the reasonable cause is cause to believe, not that the transferrer is insolvent, but cause to believe-that a preference was intended. This would, however, seem to require reasonable cause to believe that insolvency existed, and also reasonable cause to believe there was a preferential intent. The former act as amended (R. S. §§ 5128, ’5129) required that the transferee- should have reasonable cause to. believe the tranferrer insolvent, and that he should also know that the transfer was made as a preference or to defeat the object of the act. Now, no positive knowledge of any fact is required, but simply a reasonable cause to believe that a preference was intended.”

s

■ It is - established that the wife had about $12,000 of her own money, collected in April, 1900, upon a policy of fire insurance. It is established that she gave it or loaned it to her .husband, so there-existed at that time the relation of debtor and creditor. Thereafter,' and on May 3,1900, the husband caused to be conveyed to her by third parties, certain premises in Cumberland street and in Forty-seventh street, for which he had exchanged some of his realty. The husband, who was called by the plaintiff, - testified that he had agreed in April to give to his wife that or some other property, in payment or as security for the $12,000, and that as soon as he got this piece,” he suggested that he would give it to her, and that he did, thereafter, give, to her the Cumberland street property and this property for the $12,000-. Mrs. Johnson testified that. she wished something for the money, that she wished real estate, and that Mr. Johnson gave to her the Cumberland street and the Forty-seventh street property therefor. Mr. Johnson testified, without contradiction, that the value of the Cumberland street property and of the Forty-seventh street property was about $12,000. Mr. Johnson was engaged in the business of real estate. His property was in real estate, incumbered with mortgages. He testified that on May third he was solvent, provided my real estate was not — if not in actual cash. Q. Were you able at that time to pay your obliga, tians as they matured ? A. Yes; I think I was. I did not have cash enough —-- money in the bank — to pay everything ; if everything was called within twelve or twenty-four hours, then I was insolvent. Q. Would you have been able to realize enough from your property in a reasonable time — to sell the property? A. I could have paid everything in full without question.” No proof was put in by the plaintiff of the actual condition of the plaintiff’s affairs. The schedules of his assets and liabilities were not before the court, nor was there any evidence in detail offered to-establish insolvency, much less the extent thereof. The mere fact that the plaintiff was indorser upon two notes, aggregating but a small sum of money, which had been discounted for him, and which-matured on May twenty-ninth and on June sixteenth respectively, does not establish his insolvency on May third. The learned counsel for the respondent says that it is now too late to raise the objection that the evidence was not sufficient to establish insolvency, and that if it had been raised at the trial the plaintiff undoubtedly would have supplied the necessary proof conclusively to establish it. But I am considering whether the proof in the case established such facts as would have afforded reasonable cause to an ordinarily prudent person to believe that on May 3, 1900, Mr. Johnson was- insolvent, or would have afforded such a person reasonable cause to believe that the transfer made on that day in payment of a debt was with the purpose of a preference. I also remark that the character of Mr. Johnson’s, business and obligations was quite different from that of the merchant or dealer in commodities. He was engaged in transactions in real estate, in the buying, the selling and the exchanging thereof. His liabilities were due to incumbrances thereon. . The business is not like unto the buying and selling of stuff or wares, but has an element of speculation quite independent of the price lists of the markets. This renders it more difficult to infer that the creditor at any time was possessed of facts, or could, upon reasonable inquiry have become possessed of facts,- which established or ought to have established his insolvency. Moreover, this is not a case where the debtor possesses nothing wherewith to pay his debts which were unsecured, but where those debts appear us a continuous charge and an incumbrance upon the property which presumably theretofore afforded a sufficient security. Mrs. Johnson testifies that she knew nothing of her husband’s affairs; that she had no reason to believe that he had not sufficient property to pay his debts ; that she knew all about it approximately ” as to the value -of his property, but as far as knowing anything about it (i. e., that the valuation was not greater than his debts) she did not know because she “ had everything heart and hand could wish for,” and that she knew nothing about it until after his failure. I think that the evidence fails to establish that Mrs. Johnson had reasonable -cause to know or that she should as an ordinarily prudent person have known that by the transfer in question a preference was intended by the conveyance of May third.

The learned counsel for the respondent says that Mr. Johnson was Mrs. Johnson’s agent, and, therefore, his knowledge was her knowledge. This loses sight of the fact that the transaction now in view is that of a transfer from debtor to creditor, and that it must ^appear that the creditor had reasonable cause to believe that a preference was intended. In this view it makes no difference whether Mr. Johnson. conveyed the premises directly or caused another to convey them. Certainly if he conveyed them directly, his knowledge was not her knowledge, otherwise the provision of the statute would be meaningless.- And I think that his mere direction that the grantor convey to her instead, of first to him that he .might convey to her does not make him her agent in the sense that she is presumed to know all that he knew or is to be charged with his intent.

The subsequent dealings with the bank were isolated from the ■conveyance to Mrs. Johnson. If the conveyance to her was valid, then we have not even the case of an owner of property discharging the debt of another, but of the owner of property discharging the debt for which she was also liable and for which her' property might be impounded.

' The judgment should be reversed and a: new trial granted, costs to abide the final award of costs.

All concurred.

Judgment reversed and new trial granted, costs to abide the final award of costs.