Opinion ID: 249009
Heading Depth: 1
Heading Rank: 2

Heading: The Claim for $50,125

Text: 7 On May 28, 1955, Gray talked with Campbell about obtaining a loan of $50,000. He told Campbell that he wanted to give up doing business individually and do business in corporate form by activating Twin City Construction Company and channeling his construction contracts into that corporation. He stated that his health had been poor and that by using Twin City he could insure continuity and avoid personal liability. Gray said that he had arranged to obtain needed capital from a cousin who was going into business with him. 8 The Pioneer Bank made the loan of $50,000, taking Gray's personal note, payable in fifteen days. At Gray's direction, the money was deposited in Twin City's checking account. Shortly thereafter, Gray issued to himself stock of Twin City amounting to $49,500. At the time of the loan the bank held collateral mortgages amounting to $40,000 on Gray's office building and equipment, a $40,000 mortgage on his home, and a pledge of all the stock of the Blair Apartments which Gray owned. Gray gave the bank copies of corporate resolutions authorizing him to enter into any and all contracts whatsoever for Twin City and to do any and all acts whatsoever on such terms and conditions and for such considerations, within his discretion, the intention being to authorize W. A. Gray as President to represent this corporation in all matters whatsoever and to confer on him the fullest possible powers of representation. The resolutions also authorized the Pioneer Bank to honor, receive, certify or pay all instruments [signed by Gray]    even though drawn or endorsed to [Gray]    or in payment of the individual obligation of such officer, or for deposit to his personal account, and said Bank shall not be required, or be under any obligation to inquire as to the circumstances of the issuance, or use of any [such] instrument   . 9 Twelve days later, June 9, 1956, Gray informed the Pioneer Bank that his plans had fallen through, that the fellow who was going to put the money in with him wouldn't go, and that there was no necessity for the loan. The transaction was then closed out by payment to the bank of principal and interest, $50,125, in the form of a check drawn by Gray as president of Twin City. None of the $50,000 credit traceable to the loan had been withdrawn from Twin City's account. Thus, except for bookkeeping purposes to reflect a loan to Gray and deposit to the account of Twin City, the $50,000 did not leave the possession of the bank. Payment of the loan simply required a reversal of bookkeeping entries and in effect the identical $50,000 originally credited to Twin City was returned to the bank. 10 In the interval between the loan and its repayment, Twin City had a certified audit prepared showing a credit balance of $50,000 in the Pioneer Bank. This audit report and a financial statement were used by Gray in obtaining for Twin City a contractor's performance bond from the Home Indemnity Company. Before issuing a bond, but after the $50,000 loan had been repaid, Home Indemnity Company conducted an investigation of Twin City's application for a bond. Home Indemnity's investigator obtained a routine verification from the bank that as of May 31, 1955 Twin City had a balance of $50,000 in the Pioneer Bank. The bonding company made no attempt to inquire as to whether the $50,000 or any part of it was on deposit after May 31, 1955. On completion of its investigation and after it had satisfied itself with the personal guaranty of W. A. Gray, Home Indemnity wrote the bond June 21, 1956. 11 Twin City had only one construction contract, a government contract at Blytheville, Arkansas. Eventually the company defaulted and Home Indemnity, as the insurer, paid bills of $52,130.42 to complete the contract. 12 The district judge found that the Pioneer Bank had no knowledge of the issuance of Twin City stock to Gray and no knowledge of Gray's intention to have the stock issued to himself in return for the proceeds of the loan. The district judge found that the Bank's officers and employees were not parties to any misrepresentation of any character to the bonding company. The bank acted in good faith and was as much deceived by Gray as the bonding company was deceived. Just prior to the collapse of his operations in January of 1956, Gray had nine large government construction contracts in Arkansas. The district judge stated: [T]he apparently substantial character of Gray's business and account with the Bank    justified the course of dealing and confidence the Bank's President had in him. The record amply supports the findings of the district court. 13 The Trustees argue that the Twin City payment of $50,125 was a voidable transfer for three reasons. (A) Twin City's payment of Gray's personal debt to the Bank was a transfer without fair consideration under the constructive fraud provisions of Section 67, sub. d(2) (b), 11 U.S.C.A. § 107, sub. d(2) (b). (B) The transfer was part of a scheme to hinder, delay, or defraud creditors within the meaning of Section 67, sub. d(2) (d), 11 U.S.C.A. § 107, sub. d(2) (d). (C) The payment is voidable pursuant to Section 70, sub. e of the Bankruptcy Act, under the Uniform Fiduciaries Act as adopted in Louisiana, LSA-R.S. 9:- 3801-3814, particularly LSA-R.S. 9:- 3808. 14 A. Payment to the bank was not a transfer by Twin City without fair consideration under the constructive fraud provisions of the Bankruptcy Act. 11 U.S.C.A. § 107, sub. d(2) (b). 1 15 The Trustees argue that on completion of the loan to Gray, the $50,000 was Gray's to use as he pleased. When he chose to spend it by buying stock in Twin City, the money then belonged to Twin City. Twin City was a third party transferee, as to the bank. According to the Trustees' argument, when Twin City, the bankrupt, under no obligation to the bank, paid Gray's loan, it was the payment of a debt of another without fair consideration, under the language of the Act, and therefore a voidable transfer. 16 There is no doubt that usually a diversion of corporate assets for the benefit of a third person, such as the payment of the loan of another, is a transfer without fair consideration. 2 This however is not the usual case. 17 The trial court found that repayment to the bank of the identical bookkeeping credit reflecting the proceeds of a loan never withdrawn was supported by a fair equivalent in value. The district judge held that under the law of Louisiana, either on the principle of quasi-contract (unjust retention of a benefit) 3 or delictual responsibility, 4 the circumstances gave rise to an antecedent indebtedness of Twin City sufficient to satisfy the requirement of fair consideration. The court found: The circumstances of this case are unusual and the court, viewing the matter in its entirety, considers that this is, in fact and law, a situation in which the Court is called upon to exercise traditional equity powers of a Court of Bankruptcy. [168 F. Supp. 510.] 18 Whether fair consideration has been given for a transfer is largely a question of fact, as to which considerable latitude must be allowed to the trier of the facts. 5 We find that the record supports the findings of the trier of the facts in this case. 19 We are of the opinion that it is unnecessary to decide whether the facts meet the Louisiana requirements for a quasi-contract or a tort. We hold, as to the claim for $50,125, that the facts justify disregarding the fiction that Twin City was a separate legal entity. Gray and Twin City were one. 20 There was such a degree of identity and commingling of affairs between Twin City and Gray that the corporation and its sole stockholder cannot be regarded as separate legal entities, insofar as the $50,000 loan is concerned. Gray was the sole stockholder. The corporate resolutions authorized Gray to act for Twin City in whatever way he saw fit, and authorized the Bank to honor Twin City checks drawn by Gray to pay personal debts. The loan was made on Gray's credit, but the proceeds inured immediately to Twin City's credit and the ostensible purpose of the loan, as stated to the bank, was to enable Gray to do business as Twin City Construction Company instead of W. A. Gray Construction Company. The hidden purpose was to enable Gray to obtain a performance bond in the name of Twin City that Twin City was not entitled to on the state of its finances and that Gray could not obtain on the state of his finances. After this object was accomplished, and before Twin City could even begin a separate existence, Twin City, through Gray, paid back the identical money lent to Gray and deposited in the corporate account only twelve days before. From the beginning to the end of the transaction Gray as Gray, or Gray as Twin City, made no effort to separate himself from his corporation — so far as the bank is concerned. To the extent that Gray is separable from Twin City, the loan was for the benefit of Twin City; if the loan was for the benefit of Gray, the bank had no alternative, under the language of the resolutions, to honoring Gray's signature and instructions. 21 It is one thing to observe the corporate fiction as if the fiction were the truth — when the fiction is not abused. It is quite a different thing when the sole stockholder either ignores the corporation as a separate entity or uses the corporate fiction as an instrument of deceit. Here, the corporation and the individual owner were two sides of a single false coin. 22 Experienced counsel represent the parties to this appeal. They have not been able to find a case that this Court regards as similar on the facts to the instant case. 6 23 Section 67, sub. d(1) (e) provides that consideration is `fair'    when, in good faith, in exchange and as a fair equivalent therefor, property is transferred or an antecedent debt is satisfied. Section 67, sub. d(1) defines debt broadly as any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed, or contingent. 24 The requirement of fair consideration is aimed at preventing a bankrupt depleting his estate just preceding his bankruptcy either by improvidence or by action intended to defeat creditors or favor friends. As we read the statute in the light of its purpose, we think that the voidable transfer provisions were never intended to apply to this case. Here, Gray-Twin City, having accomplished the object of the loan in obtaining a performance bond, repaid the loan. There was no improvidence as in making a transfer with grossly unfair consideration, and no constructive or actual intention to defeat creditors or favor friends. 25 It seems to us that of the things Gray did, the thing that he did in paying the loan was a far, far better thing than the record shows he had ever done. 26 B. The transfer was not part of a scheme to hinder, delay, or defraud creditors within the meaning of Section 67, sub. d(2) (d), 11 U.S.C.A. § 107, sub. d(2) (d). 7 As distinguished from 107, sub. d(2) (b), subsection (d) requires a showing of actual intent to defraud creditors in order to set aside a transfer. Actual intent is a question of fact. 8 The district court held — and we agree — that there was no proof of actual intent to defraud creditors of Twin City. Gray's misrepresentations related to obtaining the bond. At the time the loan was repaid, Gray expected Twin City to be able to complete the Blytheville contract. He was confident that the venture would be a profitable one and that he would be able to rehabilitate himself financially. Although a transfer may have the effect of hindering or delaying or defrauding creditors, incidental effect is not enough to satisfy the requirement of actual intent to defraud. Coder v. Arts, 213 U.S. 223, 29 S.Ct. 436, 53 L.Ed. 772; In re Braus, 2 Cir., 1917, 248 F. 55. In any event, the Bank accepted the payment in good faith and is therefore a bona fide obligee within the protection of Section 67, sub. d(6). 27 C. The Trustees' argument for relief under the Uniform Fiduciaries Act, LSA-R.S. of 1950, 9:3801 et seq., must also fail. Section 3805 9 provides that a payee of a check or bill of exchange is liable to the drawer's principal for the proceeds if: (1) the payee had actual knowledge that the drawer-fiduciary committed a breach of trust, or (2) if, in drawing the instrument, the drawer has in fact committed a breach of trust unknown to the payee, but the payee did know that the drawer was paying a personal debt. Under Section 3808 10 a drawee-bank becomes liable to the principal when a fiduciary draws a check on the principal's account to pay a personal debt if in fact the fiduciary commits a breach of trust. 28 The important factor under the Act in holding a bank responsible for a fiduciary's breach of trust is whether or not the debt that was paid was for the personal use of the fiduciary. Thus, relief under the Act was allowed in LaVecchia v. North Carolina Joint Stock Land Bank, 1940, 218 N.C. 35, 9 S.E.2d 489, where the debtor drew a check as president of the company to buy land for his personal use. No part of the loan or its use inured to the company. Anacostia Bank v. United States Fidelity & Guaranty Co., 1941, 73 App.D.C. 388, 119 F.2d 455, involved a guardian-ward situation. The court implied that if the guardian had used the guardianship funds to pay a debt that in some way benefited the ward, instead of the guardian only, the drawee-bank would not be liable. But the loan was solely for the personal use of the guardian. 29 The loan to Gray, however, was not a loan to a corporate officer for his personal benefit such as the Act contemplates. To the knowledge of the bank, the loan was for the benefit of Twin City and deposited to Twin City's account. The conditions necessary for relief under the Act are not present here: the debt incurred was not the kind of personal debt contemplated by the Act; the Bank did not have actual knowledge of any breach of trust as to Twin City, if one was committed at all. 11