Case Name: SEBRING v. WELLINGTON
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1901-07-23
Citations: 71 N.Y.S. 788
Docket Number: 
Parties: SEBRING v. WELLINGTON.
Judges: 
Reporter: West's New York Supplement
Volume: 71
Pages: 788–794

Head Matter:
(63 App. Div. 498.)
SEBRING v. WELLINGTON.
(Supreme Court, Appellate Division, Fourth Department.
July 23, 1901.)
"1. Bankruptcy—Preference—Pre-existing Debts.
An insolvent executed a mortgage transferring all his personalty to a creditor, reciting that it was designed as security for money loaned and advanced. Previous to its execution, the insolvent, to satisfy a defalcation, borrowed from such creditor, to whom he was already indebted, promising to secure him in case of financial embarrassment, and the mortgage was made pursuant to such promise. Held, that such mortgage, being given as security for a pre-existing debt, was a preferential transfer, within the federal bankruptcy law.
2. Same—Intention to Prefer—Notice.
Where a creditor takes a mortgage from an insolvent, knowing that the latter had been deprived of a position because of a defalcation, that his principal indorser had died, and that several of his notes had gone to protest, he is chargeable with notice that such mortgage was intended to give him a preference, making it voidable by his trustee in bankruptcy, under the federal bankrupt law.
3. Same—Recovery of Property—Value—Evidence.
In a suit by a bankrupt’s trustee to recover certain property transferred as a preference, evidence as to the amount realized from a private sale of the mortgaged property by a party who purchased it of the mortgagee is inadmissible on the question of value.
Spring and Rumsey, JJ., dissenting.
Appeal from special term, Steuben county.
Action by James O. Sebring, as trustee of the estate of David McKee, against Quincy W. Wellington. From an order denying his motion for a new trial, defendant appeals. Affirmed.
Argued before ADAMS, P. J., and McLENNAN, SPRING, WILLIAMS, and RUMSEY, JJ.
Waldo W. Willard, for appellant.
Warren J. Cheney, for respondent.

Opinion:
ADAMS, P. J.
The plaintiff, as trustee in bankruptcy of one David 0. 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 si voidable preference, within the provisions of section 60 of the federal bankrupt law, 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 a petition and before the adjudication, and the person receiving it, or the person 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 the petition in bankruptcy; and (4) reasonable causé 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 1st day of April, 1899, which was withim 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 accomplish 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 pre-existing indebtedness; and, in order to determine the force of this contention, it becomes necessary to examine with some care the facts of the case, 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 bis 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 Inst., 85 U. S. 375, 21 L. Ed. 868; Clark v. Iselin, 88 U. S. 360, 22 L. Ed. 568.
It seems that, in connection with his jewelry business, McKee was acting as ticket agent at Corning for the Delaware, Lackawanna & Western Railroad Company; that-in December, 1898, it was discovered that he was a defaulter to that company in the amount of $461.77; and that on the 16th 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 thousand 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 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 Mm (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, 69 N. Y. Supp. 559; Bucknam v. Goss, Fed. Cas. No. 2,097; In re McKay, Fed. Cas. No. 323; Graham v. Stark, Fed. Cas. No. 5,676.
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 materially between the 16th day of December, when the arrangement was made to protect his deficit and overdraft, and the 12th 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 trial court in withdrawing that branch of the case from the consideration of the jury, and in submitting to them the question 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, 57 N. E. 95.
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, 43 Am. Rep. 131); 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, 31 N. E. 1032), yet we think this case fairly falls within the rule, and not within any of its exceptions.
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 evidence 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 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.
Order affirmed, with costs.
McLennan and WILLIAMS, JJ., concur.