Case Name: George W. Crooks, as Trustee in Bankruptcy of the Estates of Howard E. King and of the Firm of H. E. King & Son, Bankrupts, Appellant, v. The People's National Bank of Malone, N. Y., Respondent
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1902
Citations: 72 A.D. 331
Docket Number: 
Parties: George W. Crooks, as Trustee in Bankruptcy of the Estates of Howard E. King and of the Firm of H. E. King & Son, Bankrupts, Appellant, v. The People’s National Bank of Malone, N. Y., Respondent.
Judges: 
Reporter: Appellate Division Reports
Volume: 72
Pages: 331–340

Head Matter:
George W. Crooks, as Trustee in Bankruptcy of the Estates of Howard E. King and of the Firm of H. E. King & Son, Bankrupts, Appellant, v. The People’s National Bank of Malone, N. Y., Respondent.
Bankruptcy — what substitution of good paper for bad, by procuring the indm'sement of a third person to whom security is given by the bankrupt, constitutes a fraudulent preference.
A transfer of property by an insolvent is obnoxious to the provisions of the National Bankruptcy Act only when the transfer is made with intent to create a preference and the person benefited thereby has reasonable cause to believe that a preference is intended.
In an action by the trustee in bankruptcy of Howard E. King and of the firm of H. E. King & Son, of which firm Howard E. King was the senior member, to set aside transfers made by King to the defendant bank on the ground that such transfers created unlawful preferences, it appeared that H. E. King & Son had overdrawn its account with the defendant bank to the extent of about §2,600, and that the bank, as security for such overdraft, held certain bonds valued at about §2,000; that in part to pay such overdraft King procured his son to make a note to a third person who indorsed the same and deposited it in the bank to the credit of the firm; that the bank thereupon surrendered to the firm the collateral held by it; that King, in order to secure the maker' of the note against loss, assigned to such maker a bond and mortgage owned by him.
Held, that the evidence was not sufficient to warrant a finding that the transfer of the mortgage to the maker of the note was made with the intent to create a preference for the benefit of the bank.
It further appeared that the bank held unsecured drafts amounting to §12,000, drawn by H. E. King & Son upon one Searls, who was probably insolvent; that King, who was the president of the bank, "procured one Paddock, who was financially responsible, to indorse a demand note made by Searls for the amount of the drafts; that such note after being indorsed by H. E. King & Son was deposited in the bank and the drafts surrendered; that to secure Paddock from loss upon his indorsement King transferred to him securities valued at §10,000.
The court found that, in the negotiations which led to the substitution of the note indorsed by Paddock for the drafts, one Marshall, the cashier of the bank, acted on behalf of the bank, and that neither he nor the bank had reasonable ground to believe that King was insolvent.
Held, that King was acting in the transaction on behalf of the bank, and that the bank was chargeable with knowledge of his intent to give a preference to the bank.
Parker, P. J., dissented.
Appeal by the plaintiff, George W. Crooks, as trustee in bankruptcy of the estates of Howard E. King and of the firm of H. E. King & Son, bankrupts, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Franklin on the 13th day of April, 1901, upon' the decision of the court, rendered after a trial before the court without a jury, dismissing the complaint upon the merits.
The action is brought to set aside certain transfers of personal property, made by Howard E. King to the defendant, or for its benefit, on the ground that such transfers created unlawful preferences under the Bankrupt Law. H. E. King & Son was a partnership, composed of Howard E. King and William H. King, his. son.. Of this partnership Howard E. King was the responsible member, and he was also at all times, until he went into bankruptcy upon the 16th day of February, 1899, the president of the defendant bank. On the 4th day of February, 1899, the firm had overdrawn its account in the said bank to the extent of about $2,600. In part to pay that overdraft, one John H. King, another son not in the partnership, made his note for $3,100 to H. D. Thompson, who indorsed1 the same and deposited it in the bank to the credit of the .firm. The bank thereupon surrendered to Howard E. King some water bonds, which it held as security for the firm’s overdraft, of the value of about $2,000. To secure John H. King for his note, made for the benefit of H. E, King & Son, Howard E. King assigned to him a bond and mortgage, which he held upon the house of W. H. King. This transfer is claimed to have been in fraud of the Bankruptcy Law in creating indirectly a benefit to the bank to the extent of the overdraft, which was paid by the note of John H. King. To recover from the. bank the benefit claimed to have been received, by reason of this transfer is the. second cause of. action alleged in the plaintiff’s complaint.
H. E. King & Son had for a long time been dealing in hops. The purchase price of these hops was paid by moneys obtained from the defendant bank upon sixty-day drafts, drawn by H. E. King & Son upon one Searls, and by him accepted. There was no other security for the payment of these drafts than the liability of IT. E. King & Son and of Searls, who was probably insolvent. On the 14th day of February, 1899, two days before the insolvency, this overdraft amounted to a little upwards of $12,000. Upon that day a note was made by Searls for the amount of the drafts, which was by Howard E. King procured to be indorsed by one Paddock, who was financially responsible. That note, after its indorsement by H. E. King & Son, was deposited in the defendant bank, and the acceptances theretofore held by the bank were surrendered. To secure Paddock for his indorsement of that note Howard E. King transferred to him some bank stock and water stock, of the value of about $10,000. The plaintiff claims that this transfer was made in fact for the benefit of the defendant, and creates a fraudulent preference under the .Bankrupt Act, and to the extent of the value of this bank stock and water stock the defendant has received a benefit for which it should account to the plaintiff as trustee. This constitutes plaintiff’s first cause of action. The action was tried before the court without a jury and the complaint dismissed. From the judgment entered upon this decision this appeal is taken. Further facts appear in the opinion.
John P. Badger, for the appellant.
Ma/rtin JS. Mo Clary and John P. Mellas, for the respondent. '

Opinion:
Smith, J.:
The transfer of property by an insolvent is obnoxious to the provisions of the Bankrupt Law, only when the transfer was made with an intention to create a preference, and the person benefited thereby has reasonable cause to believe that a preference xvas intended. (30 U. S. Stat. at Large, 562, § 60.) The fact that the overdraft of $2,600 was at the time substantially secured by the water stock of Howard E. King, which was held as collateral thereto, would give full warrant to the finding of the trial court that the transfer of the mortgage to John H. King was not made with the intent to create a preference for the benefit of the bank. It is true that the overdraft was. somewhat in excess of the security which the bank already held, but the excess was slight and the nature of the transaction was such that we think a finding to the effect that the mortgage was given with an intent to create a preference 'would be unsupported by the evidence. As to the second cause of action, therefore, we aré of opinion that the complaint was properly dismissed.
As to the first cause of action a more difficult problem is presented. These drafts drawn by H. E. King & Son upon Searls, and by him accepted, amounting to upwards of $12,000, were not secured. They were confessedly, in part, worthless. In their place was substituted a note, made good by the indorsement of Paddock. That indorsement was obtained by the transfer from Howard E. King of these securities. This fact is of irresistible inference. Paddock was asked to indorse upon security given. At the time of the indorsement he asked about the security. Whatever statement he may have made as 'to his willingness to indorse, with or without security, the indorsement was, in fact, made upon consideration of the transfer of these securities. Paddock's' good faith is not questioned, nor his belief in the solvency of King. No attempt is made to take from him the securities. If. securities had been transferred directly to the bank to secure these acceptances, with an intent to create a preference, and the bank had reasonable ground to believe such was the intent, such transfer would be clearly obnoxious to the provisions of the Bankrupt Law. It is claimed, however, that instead of this direct method an indirect method' was adopted to accomplish the same result; to wit, a responsible indorser was furnished to whom the securities were transferred. The effect is to substitute good paper for bad, and, to the extent to which such substitution was obtained by the transfer of the bank stock and water stock, it is insisted that the preferred creditor should refund to the trustee the advantage obtained by this indirect preference- In this view of the case it becomes immaterial as to what right, the bank would have in security held by an indorser, and as to whether the bank would have any right thereto in case of the solvency of the indorser. It also seems to me immaterial whether Paddock had waived protest, or had been charged by protest, or even whether he had paid the note. If a preference can be thus indirectly given through the medium of an innocent indorser, who is secured, the limitations of the Bankrupt Law are practically without effect. That such a transfer is within the prohibition of the Bankrupt Law has been settled by this court by its decision upon review of an interlocutory judgment sustaining a demurrer to the plaintiff's complaint. (See Crooks v. People's Nat. Bank, 46 App. Div. 335.)
The trial court held, however, that King's knowledge was not, the knowledge of the bank. It was found as a fact that one Marshall, the cashier of the bank, acted in these negotiations for the bank, and that neither he nor the bank had reasonable ground to believe that King was insolvent. But the bank's ignorance' of the preferential intent of King can only be sustained upon the holding that King's knowledge was not the knowledge of the bank. If King's knowledge is in law imputable to the bank then the plaintiff would seem to have established an intentional preference by King, and full knowledge of such intentional preference by the defendant, a party benefited thereby.
An agent owes a duty to his principal to disclose to him any information which he may have which may be relevant to that agency. The law conclusively presumes that the agent makes such disclosure, unless the agent has some private purpose to accomplish, the accomplishment of which would be imperiled thereby. No such purpose is here apparent. King was the chief officer of the bank. Upon insolvency his first thought would be to protect the institution of which he had so long been the head. He was asking no favor of the bank the granting of which would be imperiled by knowledge of his insolvency. This was his last unsecured debt which he was securing. He was substituting demand paper for his obligations, part of which were not yet due. Even if its probable effect was to give King further time, although demand paper was given, the greater advantage was to the bank, in which was substituted good paper for poor. Marshall was not alone acting for the bank. If acting for himself King was acting equally, if not in a greater degree, for the bank. The case is not one in which the agent was negotiating at arms' length for his own advantage. Knowledge of Ms insolvency would only have made the bank the more willing to accept the substituted paper. It is true that a disclosure of his insolvency would render precarious the holding by the bank of the benefit intended to be given — no more so, however, than the disclosure by any agent of the insolvency of a third party who was endeavoring to prefer the principal. In the case of a third party the knowledge of the agent would be confessedly imputed to the principal. When the insolvency is that of the agent himself and there is no personal advantage to be gained by concealment no reason is apparent why the agent's knowledge- is not in like manner imputable to the principal. And this- conclusion is, I think, in accord with authority.
Without considering in detail the cases cited by the learned trial judge, it may be said, generally, that in all those cases in which it was held that the knowledge of the agent was not imputable to the principal the agent was acting in his own interest, and against the interest of the principal—to secure some personal advantage to himself. These facts bring the cases within the recognized exceptions to the rule. In support of our conclusion the case most nearly akin is that of Nisbit v. Macon Bank & Trust Co. (12 Fed. Rep. 686). In that .case a firm in which was the president and cashier of a bank assigned to the bank, within less than four months of insolvency, some bank stock as security for indebtedness. It was held that the knowledge of the president and cashier of the insolvency of the firm was the knowledge of the bank and the assignee in bankruptcy could recover back. (See, also, Bank of United States v. Davis, 2 Hill, 45; Holden v. New York & Erie Bank, 72 N. Y. 29; First National Bank of Blaine v. Blake, 60 Fed. Rep. 18; Getman v. Second National Bank, 23 Hun, 498; Wilson v. Pauly, 12 Fed. Rep. 129, 135; Loring v. Brodie, 134 Mass. 454, 457.)
If thése views be correct the plaintiff is entitled to a reversal of the judgment.
Judgment dismissing complaint as to first cause of action therein stated reversed on law and fact and new trial thereof granted, with costs to appellant to abide event.
All concurred, except Parker, P. J.,. dissenting in opinion. '