#### Suffel, Trustee, Appellant, vs. McCartney National Bank, Respondent.

*January 10*

February *23, 1906.*

*Bankruptcy: Preferential payments: Insolvency: Notice: Questions of fact.*

1. When the creditor of one subsequently adjudicated a bankrupt receives a payment without reasonable cause to believe the debtor insolvent or that he intended thereby to give a preference, although the facts known to the creditor, at the time of the payment, were such as would naturally produce in the mind of a reasonably intelligent man a doubt or suspicion of solvency, and such as would put a reasonably prudent man on inquiry, such payment is not preferential.

2. Grounds for reasonable belief in a present inability of a debtor to pay debts in the course of business are not necessarily grounds for believing that his property, at a fair valuation, is not sufficient to pay his debts.

3. Whether the creditor of a bankrupt in receiving a payment had reasonable cause to believe that a preference was intended is . a question of fact determinable by the jury or trial court

'Appeal from a judgment of the circuit court for Brown county: S. D. Hastings, Circuit Judge.

*Affirmed.*

*209May Y, 1902, Charles E. Dickinson was adjudged a bankrupt, and tbe plaintiff was thereupon appointed trustee of his estate and qualified as such. July 3, 1902, the plaintiff, as such trustee, commenced this action to recover $1,350 alleged to have been paid to the defendant by Dickinson April 5, 1902, as a fraudulent preference. The defendant answered by way of admissions, denials, and counter allegations, among others to the effect that up to the time of such bankruptcy proceedings, May Y, 1902, the defendant and all its officers believed said Dickinson oto be solvent and able to pay all his debts, and had no reason to believe otherwise, and that such payment by Dickinson to the defendant was received by this defendant in good faith and in the ordinary course of business and without any intention of securing a preference over his other creditors. A trial by jury having been waived and trial had, the court at the close thereof found as matters of fact: (1) That at the time Dickinson paid to the defendant the sums alleged in the complaint and admitted in the answer he was insolvent; (2) that the amount so paid by the defendant was a greater percentage on Dickinson’s indebtedness than his estate will pay to other creditors, and was a preference ;• (3) that the cashier of the defendant bank, who transacted its business in regard to said debt and payment, did not, at the time of the payment, believe Dickinson to be insolvent, and none of the officers of the defendant bank then believed him insolvent; (4) that neither the cashier of the bank nor any of its officers, at the time said payment was made, had reasonable cause to believe Dickinson insolvent nor that it was intended by said payment to give preference to the defendant; (5) that the facts known to the cashier of the defendant bank, at the time of said payment, were such as would naturally produce in the mind of a reasonably intelligent man a doubt or suspicion of Dickinson’s solvency, and were such as would put a reasonably prudent man upon inquiry, if the bankrupt law required the same diligence of creditors con-' *210ceming preferential payments tbat is required of grantees in cases of fraudulent conveyances. And as conclusions of law tbe court found tbat tbe plaintiff is not entitled to recover in tbis action and tbat tbe defendant is entitled to judgment dismissing tbe complaint upon its merits, and for costs. From tbe judgment entered in favor of tbe defendant in accordance with sucb findings, and for costs, tbe plaintiff appeals.

*John A. Kittell*and *Samuel H. Cady,*for tbe appellant.

*C.*W. *Lomas,*for tbe respondent.

Cassoday, O. J.

In reaching tbe conclusions mentioned in tbe foregoing statement tbe trial judge, in a lengthy and carefully prepared opinion, reviewed'tbe evidence as to Dickinson’s dealings with tbe bank during tbe three years immediately preceding sucb payment, and all facts tending to show what knowledge tbe cashier of the defendant, and its other officers, bad acquired during those three years as to Dickinson’s financial circumstances. It does not appear that Dickinson did business with any other bank during tbe three years mentioned. It appears from sucb summary, among other things, tbat Dickinson’s business was selling musical instruments on long time, payable in instalments, secured by leases •on tbe instruments sold; and tbat sucb business required a 'considerable capital in proportion to tbe volume of business, :and so be obtained loans from tbe bank, giving sucb leases as 'collateral. As early as in 1899 tbe cashier of tbe bank was Induced by Dickinson to believe tbat bis father-in-law, who was a man of means and bad done considerable for bis two sons, bad also advanced,' as a gift to Dickinson’s wife, $1,700. January 1, 1900, Dickinson submitted to tbe bank a statement showing bis assets to be $8,003.86 and liabilities $2,791; and in January, 1901, be referred to tbe same statement as still showing bis financial condition. In May, 1901, Dickinson borrowed from tbe bank $1,200, giving notes therefor with bis fatber-in-law as joint maker; and be then told tbe cashier *211that be wanted that amount to pay off all bis indebtedness aside from wbat be owed tbe bank. Tbe notes were not paid ■at maturity, but, as tbey were considered perfectly good, tbey were allowed to remain. January 1, 1902, Dickinson gaye tbe bank an inventory of bis stock, and a statement of bis liabilities as being $2,000 aside from wbat be owed’tbe bank. In tbe latter part of that month bis entire stock of goods was ■destroyed by fire, and a few days later bis bousebold effects were destroyed by fire, but be bold policies of insurance upon bis stock of goods to tbe amount of $4;750, of wbicb $3,250 was in companies represented by tbe defendant’s cashier as •agent, and $1,000 on bis bousebold effects, of wbicb $500 was in a company then represented by tbe defendant’s cashier, and tbe bank then held leases, as collateral, to tbe amount of •$900, and, from wbat Dickinson told him, tbe cashier supposed be bad quite an amount of other leases. About, that time tbe cashier learned that be owed other indebtedness to tbe amount of at least $2,000, and that about March 29, 1902, some small claims were being pressed for payment, and some of bis checks were unpaid for want of funds. Some time between tbe fires and March 29, 1902, tbe cashier- inquired of Dickinson whether be intended to resume business and was told by Dickinson that be bad about arranged with bis creditors to pay them fifty per cent, of tbe amount due them at ■once, and that tbey would give him time to pay tbe balance. About March 29, 1902, tbe fire losses were adjusted and paid. Tbe bank’s claim against Dickinson was secured by notes on wbicb bis fatber-in-law was joint maker and regarded as perfectly good. Nevertheless tbe cashier asked Dickinson to take up tbe notes with tbe insurance money, but did not insist ■on such payment. Dickinson, however, offered to make payment, and so tbe same was paid April 5, 1902, as stated.

Such is a general outline of tbe evidence upon wbicb the *i*■court, among other things, found, in effect, that at tbe time of making such payment neither tbe defendant’s cashier nor any *212of its officers believed Dickinson to be insolvent, nor bad they or any of them, at tbat time, reasonable canse to believe bim to be insolvent, nor tbat it was intended by said payment to give preference to tbe defendant. Sncb findings seem to have covered tbe issues in tbe case, and determined tbe same in favor of tbe defendant. But tbe court went further and found, in effect, tbat tbe facts known to tbe cashier, -at the time of sncb payment, were such as would naturally produce in tbe mind of a reasonably intelligent man a doubt or suspicion of Dickinson’s solvency, and were such as would put a reasonably prudent man upon inquiry, if tbe bankrupt law required tbe same diligence of creditors concerning preferential payments tbat is required of grantees in cases of fraudulent conveyances. Tbe obvious meaning of this language, when construed in connection with tbe other findings mentioned, is tbat tbe court held, .as a matter of law, tbat tbe present bankrupt act does not require tbe same diligence of creditors concerning preferential payments tbat is required of grantees in cases of fraudulent conveyances; and hence,, tbat tbe facts known to the cashier at tbe time of receiving tbe payment, though sufficient to produce in bis mind a doubt or suspicion of Dickinson’s solvency, yet tbat they were insufficient to prove tbat tbe cashier bad at tbe time reasonable cause to believe tbat Dickinson was then insolvent, or tbat in making such payment be intended to give a preference to the defendant. This is in harmony with tbe conclusion of tbe lengthy opinion of tbe trial judge, where be said, in effect, that tbe point to be decided was somewhat difficult, but a considerable reflection bad led bim to tbe conclusion tbat tbe knowledge of facts and circumstances possessed by tbe cashier was well calculated to produce a doubt or raise a suspicion in tbe mind of an ordinarily intelligent man as to Dickinson’s solvency, but not such as was calculated to produce a *belief*of it; and as that was essential to tbe plaintiff’s cause of action, be could not recover. Such findings of fact seem to be-sustained by tbe evidence.

*213Are tbe conclusions of tbe trial court in accordance witb tbe law applicable to tbe case ? It was beld by tbe supreme court of tbe United States under tbe bankrupt act of 1867:

> “In order to invalidate, as a fraudulent preference within tbe meaning of tbe bankrupt act, a security taken for a debt, tbe creditor must bave bad sueb a knowledge of facts as to induce a reasonable belief of bis debtor’s insolvency.” *Grant v. National*Bank, 97 U. S. 80, 82.

Mr. Justice Beadxey, speaking for tbe whole court, there said:

> “Hence tbe act, very wisely, as we think, instead of making a payment or a security void for a mere suspicion of tbe debt- or’s insolvency, requires, for that purpose, that bis creditor should bave some reasonable cause to believe him insolvent. He must bave a knowledge of some fact or facts calculated to produce such a belief in the mind of an ordinarily intelligent man.”

That case and that language were expressly sanctioned in *Barbour v. Priest,*103 U. S. 293, 297. Tbe same is true of a still later case where it was beld:

> “A creditor dealing witb a debtor whom be may suspect to be in failing circumstances, but of which be has no sufficient evidence, may receive payment or take security without necessarily violating tbe bankrupt law. "When such creditor is unwilling to trust tbe debtor further, or feels anxious about bis claim, tbe obtaining additional security or tbe receiving payment of tbe debt is not prohibited, if tbe belief which tbe act requires is wanting.” *Stucky v. Masonic Sav. Bank,*108 U. S. 74, 2 Sup. Ct. 219.

In considering tbe adjudications under tbe bankrupt act of March 2, 1867 (cb. 176, 14 IT. S. Stats, at Large, 517), it should be observed that tbe words “insolvent” and “insolvency” contained in secs. 35 and 39 of that act (14 U. S. Stats, at Large, 534, 536) bad a very different meaning than they bave under tbe present bankrupt act. Thus it was beld early under tbe bankrupt act of 1867:

> “By insolvency, as used in tbe bankrupt act when applied 'to traders and merchants, is meant inability of a party to pay *214bis debts, as they become due, in the ordinary course of business.” *Toof v. Martin,*13 Wall. 40, 47; *Wager v. Hall,*16 Wall. 584, 601.

The present bankrupt act declares:

> “(15) A person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay his creditors, shall not, *at a fair-valuation, be sufficient in amount to pay his debts.”*Act July 1, 1898, ch. 541, 30 U. S. Stats, at Large, 544, § 1, (15), 2 Supp. B. S. U. S. 844 [U. S. Comp. St. .1901, p. 3419].

To have reasonable cause to believe that a trader or merchant is unable to pay his debts as they become due in the ordinary course of business is a very different thing than to have reasonable cause to believe that the aggregate amount of the debtor’s available property and assets is insufficient in amount, at a fair valuation, to pay his debts. This distinction is pointed out by Federal Judge Lowell of Massachusetts in a very recent case, where it was held:

> “Grounds for reasonable belief in the present inability of a debtor to pay his debts in the course of business are not necessarily grounds for believing that he is insolvent within the definition of insolvency contained in” the present bankrupt act “so as to require the creditor to surrender payments received as preferences.” *In re Pettingill & Co.*135 Fed. 218, 220.

It is there said by the court:

> “Grounds for reasonable belief in a present inability to pay debts in the course of business are not necessarily grounds for believing that a man’s property at a fair valuation is not sufficient to pay his debts.”

In construing the clause of the bankrupt act here in question (sec. *60b,*30 U. S. Stats, at Large, 562 [U. S. Oomp. St. 1901, p. 3445]), it has been held by the circuit court of ap-' peals of this circuit, in an opinion by Judge JeNKINS :

> *215“In determining wbetber taking of security by a creditor constitutes an illegal preference . . . tbe creditor is not to be charged witb knowledge of bis debtor’s financial condition from mere nonpayment of bis debt, or from circumstances wbicb give rise to mere suspicion in bis mind of possible insolvency. On tbe other band, it is not essential that tbe creditor should have actual knowledge of, or belief in, bis debtor’s insolvency, but it is sufficient if be has reasonable cause to *believe him insolvent.*If facts and circumstances witb respect to tbe debtor’s financial Condition are brought borne to him such as would put an ordinarily prudent man upon inquiry, tbe creditor is chargeable witb knowledge of tbe facts wbicb such inquiry should reasonably be expected to disclose.” *In re Eggert,*102 Fed. 735, 43 C. C. A. 1; *S. C.*98 Fed. 843.

That case was cited witb approval by this court in tbe recent case of *Jackman v. Eau Claire Nat. Bank,*125 Wis. 465, 485, 104 N. W. 98, 105. As held in that case and tbe *Eggert Case,*tbe question wbetber in receiving tbe payment tbe defendant’s cashier bad reasonable cause to believe that a preference was intended was a question of fact determinable by tbe jury or trial cotirt. *Kaufman v. Tredway,*195 U. S. 271, 25 Sup. Ct. 33. We find no error in tbe record.

*By the Oourt.*— Tbe judgment of tbe circuit court is affirmed.