Source: https://supreme.justia.com/cases/federal/us/229/435/
Timestamp: 2019-04-20 22:13:17+00:00

Document:
To constitute a preferential transfer within the meaning of the Bankruptcy Act of 1898, there must be a parting with the bankrupts' property for the benefit of the creditor and a consequent diminution of the bankrupt's estate. Newport Bank v. Herkimer Bank, 225 U. S. 178.
nature of the property transferred is not as essential as the facts showing exactly what transpired between the parties.
The arrangement involved in this action, made between a bank and a grain broker in regard to transfering certificate of deposit held as collateral for dealings in rain on the Chicago Board of Trade, do not appear to have in any way diminished the estate, and held not to have amounted to an illegal preference.
The purpose of § 68 of the Bankruptcy Act is to prevent debtors of the bankrupt from acquiring claims against him for use by way of setoff and reduction of their indebtedness by way of setoff; but the transaction in this case does not come under § 68a. Western Tie & Timber Co. v. Brown, 196 U. S. 502, distinguished.
The facts, which involve the construction of certain provisions of the Bankruptcy Act of 1898 relating to preferential payments, are stated in the opinion.
This is a controversy arising in a bankruptcy proceeding, and involves questions of the right to certain property, as between the appellant, the Continental & Commercial Trust & Savings Bank, and the Chicago Title & Trust Company, as trustee in bankruptcy of Earl H. Prince, bankrupt. Two items are involved: first, the sum of $4,250, the amount of certain margin certificates issued by the predecessor of the appellant bank to the bankrupt Prince, and second, a balance of $575.79 remaining in Prince's checking account with the bank of the predecessor of the appellant, therein deposited by the bankrupt. The trustee brought the suit to recover the amount of the margin certificates and the bank balance as having been preferentially transferred within the terms of the Bankruptcy Act. The district court held the trustee entitled to recover, and this decree was affirmed by the circuit court of appeals (199 F. 704), and the case comes here.
"Federal Trust and Savings Bank"
"Deposited by E. H. Prince, $______ Dollars. As security on a contract or contracts between the depositor and __________, which amount is payable on the return of this certificate, or the duplicate of the same (one of which being paid, the other shall become void), duly indorsed by both of the above-named parties, or on the order of the president of the Board of Trade of the City of Chicago, indorsed on either of the original or duplicate hereof, as provided by the rules of said Board of Trade under which the above-named deposit has been made."
the certificate was held by the other party as security, it was paid to such other party. The record of certificates was kept in the margin register of the bank.
"That taking the said open trades so transferred as a whole, the condition of the market at the time of the transfer was such that the aggregate sum of the amounts due thereon to Earl H. Prince from members of the Board of Trade, if he had then settled the trades, would have been greater than the aggregate sums of the amount then due thereon from Prince to others of said members of the Board; that among the open trades so transferred and settled were trades with the said members of the Board who held securities or margin certificates furnished by the said Prince."
margin certificates had been closed at the opening of the Board on that day by the members holding them, there would have been due from them to Prince in the aggregate a balance of approximately one-third of the amount of the certificates after deducting therefrom the amount that would have been due to them from Prince. If the trades had been closed later in the day, the balance coming to Prince would have been considerably less. However, if Prince had carried out all of these contracts, the profits which he would have made upon some of them would have been about balanced by the losses which he would have sustained on others."
"That the plan adopted at the conference between Mr. Prince, Mr. Anderson, and Mr. Castle was doubtless the best plan that could have been adopted to avoid serious loss to Prince or to his creditors. The condition of the market was such at that time that, had Anderson & Company not taken charge of Prince's trades and carried them through, a panic might have ensued on the Board, and the market so fluctuated that the amount of all of the margin certificates, and quite likely a considerable more, would have been lost to Prince and his creditors."
all such items being entered upon the books of the bank as of February 14, 1905. The amount deposited exceeded the amount checked out by $572.54, and this amount, with the $3.25 remaining to the credit of Prince, as above set forth, left a balance of $575.79, which the bank, on February 14th, applied to Prince's general indebtedness to it.
The bank had reasonable cause to believe that Prince was insolvent from and after February 10th, and during the transactions from that date to and including February 15th.
"SEC. 60a. A person shall be deemed to have given a preference if, being insolvent, he has . . . made a transfer of any of his property, and the effect of the enforcement of . . . such . . . transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class."
"SEC. 60b. If a bankrupt shall have given a preference, and the person receiving it . . . shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee, and he may recover the property or its value from such person. . . ."
"SEC. 68a. 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. "
This case must be dealt with in the light of certain principles, established by decisions of this Court, in determining the applicable provisions of the Bankruptcy Act. To constitute a preferential transfer within the meaning of the Bankruptcy Act, there must be a parting with the bankrupt's property for the benefit of the creditor and a consequent diminution of the bankrupt's estate. New York County National Bank v. Massey, 192 U. S. 138, 192 U. S. 147; National Bank v. National Herkimer County Bank, 225 U. S. 178, 225 U. S. 184.
Much discussion appears in the briefs of counsel as to whether the deposits evidenced by the margin certificates were general deposits, creating between the bank and the depositor the relation of debtor and creditor, or were special deposits which the bank had no authority to mingle with its general funds. We do not deem it necessary to enter into a discussion of this question with a view to determining the technical question as to the nature of the relation thus created between the bank and the depositor. In cases of this character, it is essential to learn just what has taken place between the parties, with a view to ascertaining whether a preferential transfer of property to a creditor has resulted.
payable to Prince. What was done did not in fact diminish the estate of Prince otherwise available to the creditors in the bankruptcy administration, for the traders holding them would have had the benefit of the deposits under the terms of the certificates and the rules of the Board of Trade. It therefore appears that this essential element of a preferential transfer within the meaning of the Bankruptcy Act -- diminution of the bankrupt estate -- is wanting. The fact that what was done worked to the benefit of the creditor, and in a sense gave him a preference, is not enough unless the estate of the bankrupt was thereby diminished. New York County National Bank v. Massey, supra.
"Section 68b. A setoff 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 with knowledge or notice that such bankrupt was insolvent or had committed an act of bankruptcy."
It is the main purpose of this statute, as its terms show, to prevent debtors of the bankrupt from acquiring claims against the bankrupt for use by way of setoff and reduction of their indebtedness to the estate. There is no question of the solvency of Prince when he deposited the money to secure the certificates, and what was done was not the acquisition of a claim against Prince with a view to setting it off against the bank's indebtedness on the certificates, but was the satisfaction, without diminution of the estate of the bankrupt, of possible claims of others who, in the event of Prince's default, would have been entitled to the deposits represented by the certificates.
We do not think such transaction comes within the language or reason of § 68b.
account between itself and Harrison, and that therefore the company stood to Harrison in the relation of trustee, and the case was not one of mutual credits and debts within the provisions of § 68a. And furthermore, that to allow the setoff would be in violation of § 68b because, whether a trust relation existed or not, the result would be the same, for the company's knowledge of Harrison's insolvency when it acquired the claims of the latter against the laborers, with a view to using them by way of setoff, was to enable it thus to obtain an advantage over the other creditors, which it could not lawfully do.
In that case, there was a specific finding that the tie company had appropriated money which it really held in trust for Harrison, and that it had acquired the claims of Harrison against the laborers with a view to the prohibited setoff. In the case at bar, there was no finding that the bank held the money in trust for a specific purpose so as to deny it the right of setoff, or that it acquired any claim against the bankrupt with a view to making it a setoff. It is not shown that, when Prince made the deposits for the margin certificates, he was insolvent, and the deposits created no preference. What was done here, as we have said, consisted in procuring a broker to take up the trades of Prince, so that the certificates became clear of the rights of any third persons, and to do this without any diminution of the bankrupt estate. We think such a case as this is distinguishable from the case of Western Tie & Timber Co. v. Brown, supra, and does not come within the obvious reason and purposes of the prohibitions against acquiring setoffs contained in § 68b.
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 checked out for the purposes intended.
The decrees of the circuit court of appeals and of the district court are reversed, and the case remanded to the district court for further proceedings in conformity with this opinion.

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