Court Opinion

ID: 6846839
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:30:13.695203+00
Date Added: 2024-06-11T16:04:59.547434
License: Public Domain

WILSON, Circuit Judge
(dissenting).
I cannot agree to the majority opinion. It is conceded, and the evidence is conclusive on the point, that the merchandise furnished by Gonzalez & Co. and Lopez & Co. prior to January 2, 1929, or at least prior to December 21, 1928, was not furnished the bankrupt as advances to aid him in preparing, cultivating, or harvesting his crop of tobacco in the year 1928-29. Up to this time they had no agricultural lien on his tobacco crop or any right to one, nor could he give them security, thereon for such prior indebtedness, even prior to four months of the filing of the petition in bankruptcy, if done to hinder and delay other creditors.
This prior indebtedness was incurred over a period of a year beginning in ’ October, 1927, and for boots, shoes, and notions for sale in his store, the bankrupt being a merchant.
Prior to this, in October, 1927, the bankrupt had mortgaged all his real estate to Gonzalez & Co. to secure creditors whose indebtedness exceeded the value of the property or his equity therein, and had defaulted in July, 1928, in his payments under this mortgage. Failing to obtain credit elsewhere^ he appealed to Gonzalez & Co. and Lopez in December, 1928, to aid him, in harvesting his crop of tobacco on three small parcels of land totaling 25 acres, agreeing to give them a refacción or crop mortgage to secure not only future advances for agricultural purposes, but the past unsecured indebtedness of approximately $4,000. When the refacción contract was executed in January, 1929, it stated that Gonzalez & Co. and Lopez & Co. had already advanced Botet $6,000 for agricultural purposes, that is, for necessary expenses in cultivating his crop of tobacco, although they well knew that it was not advanced for that purpose, and that their total unsecured indebtedness at that time could not have exceeded $4,900, even if the advances by Lopez & Co. on December 21,1928, and by Gonzalez & Co. on January 2, 1929, were included, and if these two items are treated as a part of their advances for agricultural purposes under the refacción contract, as the opinion holds, their prior unsecured indebtedness was less than $4,000 instead of $6,000 as stated in the contract, and none of it had been advanced for agricultural purposes.
The majority opinion holds, as I understand it, that, since it does not appear that the false statements in the contract as to the amount of the prior unsecured indebtedness and that it had been advanced for agricultural purposes actually injured any creditors, presumably because the proceeds of the sale of the tobacco did not fully reimburse Gonzalez & Co. and Lopez & Co. for the amount actually advanced by them after the contract was agreed upon, though it more than reimbursed them for advances made after it was recorded, it did not prevent a valid lien attaching in equity, if not under the refacción statute of Porto Bico, and any transfer of the property to which the lien attached, or of the proceeds of a sale thereof, was not a preference under the Bankruptcy Act, even though within four months of the filing of a petition in bankruptcy.
But the appellant here claims under the refacción contract. The District Court, under sections 70 (a) (4) and 70 (b) of the Bankruptcy Act, found that the contract, though entered into more than four months prior to the petition in bankruptcy, was conceived in fraud and intended to hinder and delay creditors. The real issue before this court, is whether this finding was clearly wrong, not whether the appellant later actually advanced for agricultural purposes *241more than they'finally received. Boyle v. Gray (C. C. A.) 28 F.(2d) 7. If the contract was not fraudulent as to other creditors, then the defendant’s lien for actual advances was good and no preference resulted; but if the appellants fraudulently entered into the contract to secure for themselves, not only future amounts actually advanced for agricultural purposes, but other indebtedness for which they were not entitled to such a lien, they are not here with clean hands, and under the well-known equity rule can hold nothing under the contract. It is not a case where a part of the consideration of a contract is good and can be separated from the bad and upheld to that extent. The entire contract being conceived in fraud, a court of equity will not uphold any part of it.
I think it cannot be said that the finding of the District Court was clearly wrong. It appeared that the bankrupt with the full knowledge of both creditors, who must have known his financial condition, not only misrepresented the amount of their previous unsecured indebtedness, but also falsely stated that it was advanced for agricultural purposes. To hold that such a contract was conceived in good faith requires more credulity than I possess. The District Judge heard the witnesses and the lame explanation which the representative of the appellant gave for omitting to give credit for the payment of $1,100 on its claim, which omission was obviously done to give color to the representation that they had previous to January 2, 1929, advanced $6,000. The advances made on December 21, 1928, by Lopez & Co. and on January 2, 1929, by Gonzalez & Co. were also juggled back and forth by the parties in testifying to give color to their claim that their prior, advances total $6,000, and that their advances under the refacción contract exceeded the amount they received from the sale of the tobacco. I think there was sufficient evidence to warrant the conclusion of the District Court that the contract was fraudulent and intended by the parties to hinder and delay the other unsecured creditors of the bankrupt, especially if any credence can be given to the testimony of the bankrupt that he had reasonable ground for believing that out of the proceeds of his crop he might repay a large part, if not all, of his past unsecured indebtedness to the appellant and Lopez & Co. That the contract was entered into to insure the payment of this prior indebtedness, or any part, and to that extent to hinder other unsecured creditors from receiving their just share of the proceeds of the crop, does not render it any less fraudulent, because, owing to unforeseen causes, it failed to - produce an amount equal to the sums actually advanced after it was executed. It is the intent of the parties at the inception and not the result that determines the presence of fraud.
If, therefore, the contract was fraudulent in its inception, and it was entered into for the purpose of hindering or delaying creditors, it makes no difference whether it was made within four months or not. If invalid, any payment made within four months of the date of bankruptcy by virtue of its terms would become a preference.
If the findings by the District Court are not clearly wrong, this case does not present a situation for applying the rule as to equitable liens laid down in the cases cited in the opinion. In those eases the contract under which the lien was created was held by the trial court .and this court to have been entered into in good faith, and the alleged preference resulted merely from an enforcement of the lien and dated back to the granting of the lien, which was more than four months prior to the bankruptcy petition.
The fact that Gonzalez & Co. paid to Lopez & Co. a part of the money they received does not relieve them of liability for the full amount. They accepted a preference from the bankrupt. If they paid out part of it, it does not relieve them of the obligation of accounting for it. The trustee is not obliged to trace it into the hands of third parties.