Case Name: James O. Sebring, as Trustee of David C. McKee, a Bankrupt, Respondent, v. Quincy W. Wellington, Appellant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1901
Citations: 63 A.D. 498
Docket Number: 
Parties: James O. Sebring, as Trustee of David C. McKee, a Bankrupt, Respondent, v. Quincy W. Wellington, Appellant.
Judges: 
Reporter: Appellate Division Reports
Volume: 63
Pages: 498–507

Head Matter:
James O. Sebring, as Trustee of David C. McKee, a Bankrupt, Respondent, v. Quincy W. Wellington, Appellant.
Bankruptcy—what constitutes a fraudulent transfer—-private sales are not evidence of value.
In order to render a transfer voidable within section 60 of the Federal Bankruptcy Law it is necessary to establish the insolvency of the transferrer, the obtaining by one creditor of a greater percentage of his .debt than any other creditor of the same class, the making of the transfer within four months before the filing of the petition in bankruptcy and reasonable cause on the part of the creditor to believe that a. preference was intended.
A party in failing circumstances who hopes to overcome his business embarrassment does not violate the Bankruptcy Law by pledging his property for money loaned to him in good faith, provided the money is loaned at the time the pledge is made and the lender has reason to suppose that the purpose of the loan is to give encouragement to the hopes of the borrower.
What evidence establishes that a chattel mortgage, covering the mortgagor’s entire property, executed by an insolvent debtor to one of his creditors one month: befoie the filing of a petition in bankruptcy, was intended to create a preference in favor of such creditor and that the latter had reasonable cause to believe that a preference was thereby intended, considered.
In an action brought by the trustee appointed in the .bankruptcy proceeding against the mortgagee to recover the value of the mortgaged property, in which it appears that, subsequent to the execution of the chattel mortgage, the mortgaged property was sold at public sale and was purchased by the mortgagee and was thereafter sold by him to a third party, proof of the price realized by the third party from the sale .of the property at private sale is not competent evidence on the question of the value of the mortgaged property.
Spring and Bumsey, JJ., dissented from the last proposition.
Appeal by the defendant, Quincy W.'Wellington, from an order of the Supreme Court, made at the Steuben Trial Term and entered in the office of the. clerk of the county of Steuben on the 24th day of September, 190.0, denying the defendant’s motion for a new trial made upon the minutes upon the rendition of a verdict of a jury in. favor of the plaintiff after a trial at the Steuben Trial Term.
Waldo W. Willard, for the appellant.
Warren J. Cheney, for the respondent.

Opinion:
Adams, P. J.:
The plaintiff, as trustee in bankruptcy of one David C. McKee brings this action against the defendant, a banker residing and doing business in the city of Corning, to recover the value of certain personal property transferred by the bankrupt to the defendant under circumstances which it is claimed created a voidable preference within the provisions of section 60 of the Federal Bankrupt Law (30 II. S Stat. at Large, 562), which reads as follows, viz.:
" See. 60. Preferred Creditors, a. A person shall be deemed to have given a preference if, being insolvent, he has procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or 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.
" b. If a bankrupt shall have given a preference within four months before the filing of a petition, or after the filing of the-petition and before the adjudication, and the person receiving it, or to be benefited thereby, or his agent acting therein, 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."
And it seems to be conceded that in order to render .a preference, voidable within the provisions of this section, it is necessary to establish four facts, viz.-: (1) The insolvency of the transferror; (2) the obtaining by one creditor of a greater percentage of his debt than any other creditor of the same class ; (3) the giving of a preference within four months before the filing of a petition in bankruptcy; and (4) reasonable cause on the part of the creditor to believe that a preference was intended.
The method by which the illegal preference was accomplished in this case was a chattel mortgage upon a stock of jewelry, silverware, clocks,, musical instruments, etc., contained in a store occupied by the bankrupt at No.. 54 Pine street, in the city of Corning, N. Y.
This mortgage was executed and delivered on the 12th day of January, 1899, at which time it'is conceded that the. mortgagor, David C. McKee, was insolvent. It is likewise established beyond all controversy that the effect of this mortgage was tO'transfer to the defendant substantially all the personal property then owned by the mortgagor, and, that the defendant was consequently secured for a greater proportion of his debt than any of the mortgagor's other creditors. It further appears that the petition in bankruptcy was filed in the month of February, 1899, and that McKee was adjudged a bankrupt on the first day of April following, which was within four months after the execution of the chattel mortgage. It follows, therefore, that the only essential elements of the plaintiff's cause of •action about which there is or can be any controversy are the alleged giving of a preference by the bankrupt and the existence of a reasonable cause upon the part of the defendant to believe that the chattel mortgage in. question was intended to accomjfiish that result.
In support of the defendant's contention that the chattel mortgage was not a preferential transfer of property within the inhibitory • principle of the Bankrupt Act, it is asserted that it was in part at least a mere security for a present advance, instead of one for a preexisting indebtedness; and in order to determine the force of this •contention it' becomes necessary to examine with some care the facts of the ease, for it is undoubtedly true that a- party in failing circumstances, but hoping to overcome his business embarrassments, violates no principle of any bankrupt law by pledging his property for money lent him in good faith, provided the money is lent at the time the pledge is made and the lender has reason to suppose that the purpose of the loan is to give encouragement to the hopes of the party borrowing. (Tiffany v. Boatman's Institution, 85 U. S. 375 ; Clark v. Iselin, 88 id. 360.)
It seems that in connection with his jewelry business McKee was acting as ticket agent at Corning for the Delaware, Lackawanna and Western Railroad Company ; that in December, 1898, it was dis covered that he was a defaulter to that company in the amount of $461.77, and that on the sixteenth day of that month his wife applied to the defendant for financial aid in order to extricate her husband from the consequences of his defalcation. McKee had been a customer of the defendant's bank for many years, his principal relation being that of borrower, and at this time the bank held his notes for several thousands of dollars and his account was overdrawn.
At first the defendant gave Mrs. McKee but little encouragement: to expect any assistance, but he afterwards yielded to her importunities and promised' to advance whatever her husband's deficiency proved to be, and also to pay one or two outstanding checks. Some conversation then ensued relative to security, and the defendant finally said that he would give Mrs. McKee a certificate of deposit for the deficiency of $461.77, and that when the checks were in she could make up the security. A settlement was thereupon had. between McKee and the railroad company, the defendant furnishing-the money therefor, and subsequently a check for $58 upon the-defendant's bank was paid.
It does not appear that any immediate steps were taken to furnish security for this accommodation, but McKee testified, and in this he is not contradicted, that there were times previous to. January 11, 1899, when he had conversations with the defendant about securing him for what he was owing the bank in case he ever had financial difficulties; that he promised the defendant that if he found he could proceed no further he would notify him and that pursuant to this promise he did notify him on the day above named that he wished to see him. The defendant thereupon called at • McKee's house and was informed by him that he wished to give him (Wellington) a chattel mortgage as security for what he was owing. The defendant thereupon prepared a statement of McKee's indebtedness to the bank showing that including the $461.77 paid to the railroad company, and an overdraft of $143.54, it amounted to the sum of $3,554.03, and for this amount the mortgage in question was executed the following day, it being stated in the body of the instrument that it was designed as security for money loaned and advanced "on various occasions by the said Quincy W. Wellington to me." The property specified in this mortgage embraced all of which the mortgagor was the owner, and soon after the execution and delivery of the mortgage it was. sold at public sale and bid in by the defendant for the sum of $500.
The foregoing facts are undisputed, and we think it requires no •argument to show that they establish beyond all question that this -mortgage was not given either in whole or in part as security for -a present advance, but for a pre-existing indebtedness; that its effect was to create a preference, in favor of the defendant, or his bank, and that consequently within both the letter and the spirit of the Bankrupt Act it was voidable at the plaintiff's option, provided the mortgagee had reasonable cause to believe that a preference was thereby intended. (Crittenden v. Barton. 59 App. Div. 555; Bucknam v. Goss, 13 N. B. R. 337; Ex Parte Ames, 7 id. 230 ; Matter of Graham v. Stark, 3 id. 93.)
That the defendant did know, or ought to have known, the object for which his security was given, seems to be established by proof equally clear and conclusive. McKee's financial condition had changed very materially between the sixteenth day of December, when the arrangement was made to protect his deficit and overdraft, and the twelfth day of January, when the chattel mortgage was given. During this interval he had been deprived of his agency for the railroad company and his principal indorser had died : both of which facts were known to the defendant. Several of' McKee's notes had gone to protest at the defendant's bank, and two of them were concededly worthless without some additional security. Moreover McKee himself was sick and discouraged and had sent for the defendant in fulfillment of a promise made to the latter that whenever he found himself in financial difficulty he would secure him. That McKee intended, through the medium of this mortgage, to secure and prefer the defendant, is not, and in the -circumstances of the case, cannot well be denied, and that the defendant, with his large business experience, must have been aware of such intention, is too apparent to admit of any question; and we .are, therefore, of the opinion that all the essential elements of an avoidable preference were so clearly established as to justify the :frial court in withdrawing that branch of the case from the considera-tidn of the jury and in submitting to them the questibii of •value only.
As bearing upon this question it is contended that the .trial justice- erred in excluding evidence of the amount realized from the sale of the chattel mortgage property by the party who purchased it of the defendant.
It seems that shortly after bidding in the property at the chattel mortgage sale the defendant disposed of it to one Robert W. Terbell, who thereafter from time to time added to the stock and sold it as best he could.. In doing this he was assisted by one Sternberg, who was called as a witness for the defendant, and after testifying that he helped Terbell sell the stock at private sale and at auction, was asked what it sold for. To this question an objection was interposed which was sustained by the court and an exception was duly taken. Thereupon Terbell was-called to the stand, and in reply to an inquiry by the court as to what was expected of this witness, the defendant's counsel said : " I propose to show what this stock brought at private sale immediately after the auction sale that has been testified to." This offer was likewise excluded and another exception taken. We think these rulings of the trial court were right, for although Sternberg had testified that the stock was sold at both private and public sale, yet it was the manifest purpose of the defendant's counsel, as he frankly declared, to show what it brought at private sale, and this, we think, he was not entitled to do under the circumstances of this case. (Latimer v. Burrows, 163 N. Y. 7.)
The general rule where the value of personal property having a market value is sought to be established, is to prove such value by witnesses qualified to speak of it (Jones v. Morgan, 90 N. Y. 4,10), and while undoubtedly there are exceptions to this rule, one of them being that under somewhat peculiar circumstances the amount subsequently obtained on a private sale between other parties may be considered as some evidence of value (Parmenter v. Fitzpatrick, 135 N. Y. 193), yet we think this case fairly falls within the rule, and not within any of its exceyffions.
The property embraced in the chattel mortgage had a market value, and evidence thereof was given by witnesses who had seen the property and inventoried it, and thus had qualified themselves to speak of its value. To have allowed third parties to testify to what the property brought at a subsequent private sale, when its character had more or less changed, would furnish most unsatisfactory evi dence of value at the best, and it would establish a rule which, as is pointed out in Latimer v. Burrows (supra), would be fraught with serious consequences. The circumstances under which such evidence was declared admissible in Parmenter v. Fitzpatrick (supra) were very peculiar, and if we correctly apprehend the more recent decision of the Court of Appeals, the rule which permitted its admission in that case is one of exceptional application, which ought not to be tolerated in ordinary circumstances.
We deem it proper to add that there is nothing in the record before us which tends to show any actual fraudulent intent on the part of the defendant. He was simply offered a preferential security for what was owing him, and in accepting the same unfortunately violated a provision of a comparatively recent law, which rendered his security unavailing for the purpose for which it was designed.
The order appealed from should be affirmed. '
' McLennan and Williams, JJ., concurred; Spuing- and Rumsey, JJ., dissented.-