Case Name: Stuart, Trustee, Respondent, vs. Farmers Bank of Cuba City, Appellant
Court: Wisconsin Supreme Court
Jurisdiction: Wisconsin
Decision Date: 1908-11-27
Citations: 137 Wis. 66
Docket Number: 
Parties: Stuart, Trustee, Respondent, vs. Farmers Bank of Cuba City, Appellant.
Judges: KeRwiht, T. I concur in the foregoing opinion of Mr. Justice Timlin-.
Reporter: Wisconsin Reports
Volume: 137
Pages: 66–79

Head Matter:
Stuart, Trustee, Respondent, vs. Farmers Bank of Cuba City, Appellant.
September 11 —
November 27, 1908.
Trial: Instructions to jury: Banhruptcy: Preferential payments: Fraudulent conveyances: Suspicion: Courts: Federal decisions: Stare decisis.
1. In an action by a trustee in bankruptcy to recover a payment made to a creditor of the bankrupt, alleged to bave been made as a preference, the court instructed the jury that the words “ ‘reasonable cause to believe that it was intended to enable the [creditor] bank to obtain a greater percentage of its debts than other creditors would be able to obtain’ does not mean reasonable cause to suspect such intention. It is not enough that the creditor had some cause to suspect that his debtor did not have sufficient property left to pay an equal percentage to other creditors of the same class, but he must have such knowledge of • facts as to induce a reasonable belief thereof, or of circumstances to put Mm on inquiry, in order to find that the creditor, had reasonable cause to believe that a preference was intended.” Held erroneous, since the jury were thereby warranted in finding against the defendant bank, although it did not have reasonable cause to believe in the bankrupt’s intent to give a preference.
2. Under the federal bankruptcy act it is only when the facts known to the creditor are such as would induce a present belief in the ordinarily prudent and intelligent business man that his debtor is insolvent and intends a preference that the creditor is prohibited from collecting or securing his debt or a part thereof.
3. That state of mind which in a reasonable man would lead to inquiry is called mere “suspicion,” and as regards notice of fraudulent intent under which conveyances by a debtor to a creditor with intent to defraud are held void, the burden the state law has placed upon the freedom of doing business, that if a reasonably prudent man would be moved to inquiry, and inquiry wo'uld disclose facts leading to a belief, that is sufficient, is for the protection of creditors against actual fraud.
4. Apart from some statutes in case of assignments, there is nothing in state policy, nor in the policy of the common law, to prevent a debtor from honestly paying one creditor to the exclusion of others, although knowing and intending that thereby he would give a preference.
6. The construction oí the federal bankruptcy act finally rests with the federal courts and at last with the supreme court of the United States, and in case of no d'ifierence of opinion among those courts, or if the supreme court has finally spoken on that subject, the state court should be guided by such utterance, otherwise it is the duty of the state court to decide for itself.
6. When the state court upon full consideration has decided for itself the proper construction of the federal bankruptcy act, the rule of stare cleoisis would seem to require adherence to that decision, especially where the view thus established is supported by the later utterance of the federal supreme court.
Timlisst and Kebwim", JJ., dissent.
Appeal from a judgment of tbe circuit court for La Crosse county: J. J. Fbuit, Circuit Judge.
Reversed.
One Ealpb B. Luekey was on tbe 5tb day of February, 1907, adjudged bankrupt upon an involuntary petition filed January 18, 1907. For years be bad been a general merchant at Cuba City, doing bis banking business with tbe defendant, and for some time bad also been treasurer of tbe school district. Early in 1895 Luekey was indebted to tbe bank in tbe sum of about $4,000. He also was in arrears to tbe school district, having shortly before received $10,000 of school district money, deposited tbe same in bis general bank account, and so checked against that account that only some $4,000 remained to bis credit therein. Tbe cashier of tbe bank was one of tbe sureties on bis bond and became disturbed at tbe condition, and urged that be at least make good tbe school moneys. After some negotiation tbe two sureties upon bis school treasurer bond and tbe two other members cf tbe board undertook to sign notes for $7,750, which, with the moneys to his credit at tbe bank, would make good that fund. It is claimed by tbe defendant that tbe bank refused to lend this $7,750 to Luekey, but merely consented to loan it to tbe persons who signed tbe note. Tbe loan was in fact made, however, on tbe note of tbe parties other than Luekey and tbe money placed to the credit of the school district in the name of Luekey as treasurer. At the same time his own notes for $4,000 to the bank "were taken up, thereby discharging certain indorsers, and his new notes to the amount of $4,000 given in lieu thereof, which were secured by a written guaranty of the same persons who signed the $7,750 notes. A transfer from his general bank account to the bank account of the school district was made so as to make that account equal the school moneys in his hands. Tie continued to do business, paying in one way and another nearly $4,000, which were applied upon the $7,750 notes, until October or November, 1906, when the bank, and perhaps his sureties, became impatient, the indebtedness not having been reduced as promised. After considerable urgency, and efforts on his part to reduce his stock and make payments, ho finally, early in November, sold out his business at the full amount of the inventory of the stock and nearly $1,000 bonus. At that time $1,000 was paid by the purchasers and placed by him in his general bank account. The balance was to be paid when the inventory of the stock was to be completed. This was accomplished December 5, 1906, at which time he received checks for $7,300 from those purchasers, which he handed to the bank officers for application upon the claims which the bank held. The officers of the bank credited this $7,300 into his general account, already containing $600 or $700, and then made applications by debit charges against that account sufficient to satisfy all bis notes, and delivered up his notes, including the $7,500 note not signed by him. ITow far such applications were authorized by him so as' to constitute voluntary payments was a matter of contention between the parties. After the trustee in bankruptcy had been appointed, suit was brought in the circuit court for Dane county (venue being after-wards changed to La Crosse county) to recover the amounts of such payments from the defendant bank as unlawful preferences under the bankruptcy law. Upon the trial the parties stipulated that the court might find that Luckey was in solvent- .December 5, 1906, as a part of tbe special verdict, and that tbe payments by Luckey would enable sucb bank to obtain a greater percentage of its debts and claims than would be obtained by other creditors having claims of the same class, and that, after special verdict had been returned, the court should find the amount paid by Luckey to the bank in December, 1906, and a finding of Luclcey’s intent in making the payments in case he should determine it to be necessary, and also to find whether the sums of money received by the bank were offsets or not. Thereupon the court submitted two questions to the jury: First. Were the loans of April 11, 1905, made by the defendant bank, of $7,750, loans to Ealph B. Luckey? Answered “Yes.” Second. Did the bank officers on December 5, 1906, have reasonable cause to believe that by the payments made by Luckey to said bank on said day it was intended thereby to give the bank a preference ? Answered “Yes.” . No findings were made by the court, but, after due motions to raise all questions present on this appeal, judgment was entered in favor of the plaintiff for $7,915.12, with interest thereon from the commencement of the suit, from which judgment defendant appeals.
Eor the appellant there was a brief by S. F. Smalley and Morris, Riley & Dudgeon, attorneys, and Olin & Butler, of counsel, and oral argument by Mr. H. L. Butler, Mr. M. H. Dudgeon, and Mr. Smalley.
For the respondent there was a brief by Richmond, Jade-man & Swansen, attorneys, and Lacy, Brown & Lacy, of counsel, and oral argument by S. T. Swansen.
They contended, inter alia, that the instruction quoted in the opinion was largely taken from Jackman v. Fau Claire Nat. Bank, 125 Wis. 465, which case was afterwards affirmed by the supreme court of the United States (Fau Claire Nat. Bank v. Jackman, 204 U. S. 522), and cited as other authorities supporting the instruction, Hargreaves Bros. v. Hackney, 74 Neb. 700, 104 N. W. 855, 856; Capital Nat. Bank v. Wilk erson, 36 Ind. App. 467, 473, 75 N. E. 837, 839; Parlcer v. Blade, 143 Eed. 560, 562, 151 Fed. 18; In re Hines, 144 Fed. 543, 545, 546; Sundheim v. Ridge Ave. Barde, 13& Fed. 951; Wetstein v. Franciscus, 133 Fed. 900; In re Andrews, 135 Fed. 599; Crittenden v. Barton, 59 App. Div. 555, 5 Am. Bankr. Rep. 775, 777; In re Virginia H. Mfg. Co. 139 Fed. 209; In re Pease, 129 Fed. 446, 448, 450, 451; Iloudc v. Christy, 152 Fed. 612; Walbrun v. Babbitt, 16 Wall. 577, 21 L. Ed. 489; In re Knopf, 146 Fed. 109; Coder v. McPherson, 152 Fed. 951, 952; Roberts v. Johnson, 151 Fed. 567; Western T. & T. Co. v. Brown, 129 Fed. 728, 730; Stevens v. Oscar Solway Co. 156 Fed. 90, 19 Am. 'Bankr. Rep. 399, 403; In re Lynden M. Co. 156 Fed. 713,. 714; In re McMurtrey, 142 Fed. 853, 856; Pittsburgh P. Q. Co. v. Edwards, 148 Fed. 377; Sardy v. Cray, 144 Fed. 922, 931; Wright v. Sampler, 152 Fed. 196, 198; In re Coffey, 19 Am. Bankr. Rep. 148, 165; John Naylon & Co. v. Christiansen S. Mfg. Co. 158 Fed. 290, 293; In re W. W. Mills Co. 162 Fed. 47.

Opinion:
The following opinion was filed September 29, 1908:
Dodge, J.
This ease, as presented by tbe record, is involved in muck confusion. Certain issues of fact were submitted to tbe jury and other controverted issues were withheld from it, some of them by consent of counsel that the court might find upon them, and others apparently without any consent at all of the attorneys. The issues other than those which were submitted to the jury were: First. Was^ Luckey insolvent? Second. Did the defendant have reasonable cause to believe so ? Third. Did the transaction between the bankrupt and the defendant at the time of the alleged payment constitute a payment or transfer by the bankrupt, or merely an exercise by the creditor of its right in in-vitum to apply its indebtedness on open account to him upon his debts to it? This question was severable in its applica tion to the whole transaction and also to several individual items of so-called payment. Fourth. "Was the defendant the real party benefited by the payment, or the so-called sureties? • On all these questions there was at least claimed to be some evidence in favor of the defendant's contentions; on some of them, that it clearly preponderated in defendant's favor. There is no indication in the record that any tribunal has passed upon these questions of fact specifically, unless we indulge in the presumption, because they were so plainly in issue, that the court. must be deemed to have' passed upon them in rendering judgment against the defendant. In view, however, of the conclusion we have reached upon one of the assignments of error, which conclusion must necessitate a new trial, we forbear to express our opinion whether the evidence is sufficient to support either the verdict of the jury upon the two questions submitted to them or the apparent conclusion of the court upon the questions of fact not so submitted.
Error is assigned upon the instruction under which the second question of the special verdict was submitted to the jury. A material and illustrative part of that instruction was as follows:
"The jury are instructed that the words 'reasonable cause to believe that it was intended to enable the bank to obtain a greater percentage of its debts than other creditors would be able to obtain' does not mean reasonable cause to suspect such intention. It is not enough that the creditor had some cause to suspect that his debtor did not have sufficient property left to pay an equal percentage to other creditors of the same class, but he must have such knowledge of facts as to induce a reasonable belief thereof, or of circumstances to put him upon inquiry, in order to find that the creditor had reasonable cause to believe that a preference was intended."
It is contended that the last portion of this instruction is erroneous; that only when the facts known to the creditor are such as would induce a present belief in the ordinarilv prudent and intelligent business man that his debtor is insolvent and intends a preference is he prohibited by the bankruptcy act from collecting or securing his debt or a part thereof. The court has obviously by these words,'and others to similar effect elsewhere in the charge, instructed the jury that although the facts that the creditor then knows may not be sufficient to induce that belief, yet, if a reasonably prudent man would be put upon inquiry thereby, and if upon such inquiry he might learn other facts, then he is chargeable with notice of the insolvency and intent to prefer, if such facts, which he did not know but upon inquiry would be likely to ascertain, would warrant such belief. There is considerable variance in expressions of courts upon this subject. The supreme court of the United States has in several cases declared that the reasonable ground of belief intended by the bankruptcy act is the present knowledge of the creditor; that he may safely act upon what he knows, and that, if the reasonably prudent and intelligent man would not be led to a belief of insolvency or preferential intent by such facts, it is not the purpose of the bankruptcy act to prevent collection or securement of debts in the ordinary course of business; and there are many decisions to like effect by other courts. Merchants' Nat. Bank v. Cook, 95 U. S. 342, 346; Grant v. Nat. Bank, 97 U. S. 80, 82; Barbour v. Priest, 103 U. S. 293, 297; Stucky v. Masonic Sav. Bank, 108 U. S. 74, 2 Sup. Ct. 219; In re Goodhile, 130 Fed. 471, 12 Am. Bankr. Rep. 374; Sundheim v. Ridge Ave. Bank, 138 Fed. 951, 15 Am. Bankr. Rep. 132; In re Hines, 144 Fed. 543, 16 Am. Bankr. Rep. 495, 497; May v. Le Claire, 18 Fed. 164; Blankenbaker v. Charleston State Bank, 111 Ill. App. 393. On the other hand we find in the utterances of several of the inferior federal courts, and of some of the state courts, appended to this doctrine the further rule that if a reasonably prudent man would be moved to inquiry, and inquiry would disclose facts leading to a belief, that is suf ficient. In re Eggert, 98 Fed. 843; In re Virginia H. Mfg. Co. 139 Fed. 209, 15 Am. Bankr. Rep. 135; Wright v. Sampter, 152 Fed. 196, 18 Am. Bankr. Rep. 355; In re Coffey, 19 Am. Bankr. Rep. 149; Bardes v. First Nat. Bank, 122 Iowa, 443, 98 N. W. 284. Whether such courts have always recognized the distinction between the two ideas or considered that they were only defining and making more clear the rule of the supreme court, we are unable to say. But we think it clear upon any careful analysis of the ideas expressed that these cases import an additional serious burden upon ordinary transactions in the collection of debts within the four months preceding bankruptcy and while the debtor is in the ordinary course of business. The latter rule as laid down is substantially the rule of Wisconsin in regard to notice of fraudulent intent under Avhich conveyances by a debtor to a creditor with intent to defraud creditors are held void. Rindskopf v. Myers, 87 Wis. 80, 57 N. W. 967. That state oí mind which in a reasonable man would lead to inquiry is called mere "suspicion." This burden the state law has placed upon the freedom of doing business for the protection of creditors against actual fraud; but, apart from some statutes in case of assignments, there is nothing in state policy, nor indeed in the policy of the common law, to prevent a debtor from honestly paying one creditor to the exclusion of others, although knowing and intending that thereby he will gain preference. Bleiler v. Moore, 94 Wis. 385, 69 N. W. 164; Shepard v. Ostertag, 106 Wis. 82, 81 N. W. 1103. The bankruptcy act has added a new and very serious limitation upon the freedom of business intercourse. An act, however much in the ordinary course of business, by which a merchant pays a debt is liable to be reviewed and rescinded if it happen that within four months thereafter the debtor becomes bankrupt. It is therefore entirely reasonable that a less stringent rule of caution .be required in the mere reception of payment or security by a" creditor simply because it ultimately results in preferring bim tban in the case of a transfer to him, whether by payment or otherwise, which is made with the actual intent to defraud other creditors. The distinction between the first rule above stated, namely, that of a reasonable belief deducible from the facts then within the knowledge of the creditor, and the second rule, namely, his charge-ability with facts which he might on inquiry ascertain, was carefully considered in the recent case in this court of Suffel v. McCartney Nat. Bank, 127 Wis. 208, 106 N. W. 837. There the circuit court had expressly found that the facts known by the creditor at the time of the payment were not of themselves reasonable cause to believe in insolvency or preferential intent; but that if the rule applicable to fraud cases in our own court were to be applied, they were such "as would naturally produce in the mind of a reasonably intelligent man a doubt or suspicion of the solvency, and were such as would put a reasonably prudent man upon inquiry." Upon this state of facts the circuit court, relying upon the above cases in the supreme court of the United States, held that the payment did not constitute an illegal preference. That case was most carefully considered in this court after able argument, where was brought to our attention the case of In re Eggert, 102 Fed. 735, and the approving case of Jackman v. Eau Claire Nat. Bank, 125 Wis. 465, 104 N. W. 98, which is one of the cases asserting the duty of inquiry to be upon the creditor, and the rule applied by the circuit court was approved. The Bggert Case was referred to at the end of the opinion with no further comment thereon upon this subject, but, obviously, by the decision reached the rule of that case embodied in the last two lines of the portion quoted, requiring inquiry, was rejected. The Jach-man Case was affirmed by the supreme court of the United States, but the particular question in hand was in no wise considered. 204 U. S. 522, 27 Sup. Ct. 391
Of course tbe construction. of the bankruptcy act finally rests with the federal courts and at last with -the supreme court of the United States. If there were no difference of' opinion among those courts, _ or indeed if the supreme court had finally spoken on that subject, we should of course beguiled by such utterance. But where variant views are entertained it is the duty of this court to decide for itself. When it has done so once upon full consideration, at least the rule of stare decisis would suggest the duty and certainly the advisability of adhering to the rule laid down. Especially does that course seem proper in the present instance, where the view established in the Suffel Case is supported by the later utterance of the federal supreme court. We-think the law must be held settled in accordance with that case, and that the instruction given in the case at bar warranted the jury in finding against the defendant, although it did not have the reasonable cause to believe in the bankrupt's intent to give a preference as those words must be-construed. Thereby error, obviously prejudicial, was committed.
By the Court. — Judgment reversed, and cause remanded for new trial.