EAU CLAIRE NAT'L BANK V. JACKMAN, 204 U. S. 522 (1907)

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U.S. Supreme Court

Eau Claire Nat'l Bank v. Jackman, 204 U.S. 522 (1907)

Eau Claire National Bank v. Jackman

No. 163

Argued January 16, 17, 1907

Decided February 25, 1907

204 U.S. 522


Where the bankrupt, within four months of the petition, mortgages his property to a creditor having knowledge of his insolvency and thereafter conveys it to a third party subject to the mortgages and the creditor forecloses and as a result of the transaction obtains a greater percentage on his claim than other creditors of the same class, the transaction amounts to a voidable preference, and the trustee can recover from the creditor the value of the property so transferred.

A trustee in bankruptcy can maintain a suit to recover the value of a voidable preference without first electing to avoid such preference by notice to the creditor receiving the preference and demand for its return.

A demand is not necessary where it is to be presumed that it would have been unavailing.

The right of the trustee in bankruptcy to recover property obtained in fraud of the Bankruptcy Act is not varied by how the property would be administered and distributed between the different classes of creditors; all creditors, whether general or preferred, are represented by the trustee.

Where there is a voidable preference, the creditor receiving it cannot, in a suit of the trustee in the state court to recover the value thereof, litigate the validity of other claims against the bankrupt and whether other creditors have received, and not been required to surrender, preferences

125 Wis. 465 affirmed.

This action was brought by defendant in error, hereafter called the trustee, in the Circuit Court of Eau Claire county, State of Wisconsin, against the plaintiff in error, hereafter called the bank, under section 60b of the Bankrupt Act of 1898, to recover the value of property which, it is alleged, was transferred by the bankrupt to the bank for the purpose of giving the latter a preference over other creditors. Judgment was recovered by the trustee, which, on appeal, was affirmed by the supreme court of the state. 125 Wis. 465. Thereupon this writ of error was sued out.

The complaint of the trustee alleges that, on the seventh of June, 1902, John H. Young duly filed his petition in bankruptcy

Page 204 U. S. 523

in the United States District Court for the Western District of Wisconsin, pursuant to the act of Congress, and was on said day duly declared a bankrupt. Subsequently defendant in error was duly elected and appointed by the creditors of the bankrupt as trustee in bankruptcy, and duly qualified as such trustee.

The plaintiff in error is, and was at all the times mentioned in the complaint, a national bank. Young, during the four months immediately preceding the filing of his petition, was the owner and in possession of certain lumber, shingles, and lath, located at Cadott, Chippewa County, Wisconsin, and certain logs in or near the Yellow river and Chippewa River in Chippewa County, which were reasonably worth the sum of $35,000. The value of all other property owned by him did not exceed the sum of $500.

On the tenth of February, 1902, Young was wholly insolvent, and owed debts which largely exceeded the value of his property, which fact was well known to him and the bank. The aggregate amount of his indebtedness exceeded the sum of $40,000, and the value of his property was substantially $35,000. He was indebted to the bank in the sum of $27,000 for moneys borrowed from time to time for a period of about two years previous to that time. On said day, Young executed to the bank a chattel mortgage on 2,100,000 feet of saw logs, to secure the sum of $15,900, then owing from him to the bank, and also executed a chattel mortgage, transferring 1,000,000 feet of lumber, about 600,000 shingles, and about 200,000 lath, to secure the sum of $11,100, owing by him to the bank. This indebtedness existed long prior to said mortgages, and the property transferred constituted substantially all of the property then owned by Young not exempt from execution, which facts were well known by him and the bank. The effect of the foreclosure of the mortgages would be to enable the bank to obtain a much larger percentage of its debt than would the other creditors of Young in the same class as the bank. The mortgages were given by Young and taken

Page 204 U. S. 524

by the bank for the sole purpose of hindering and delaying the other creditors, and were executed and received for that purpose, and the bank, at the time of their execution, had reasonable cause to believe that they were given with the intention to give it a preference over other creditors.

The Waters-Clark Lumber Company is a corporation of the State of Minnesota, and D. S. Clark is the president thereof and also a director in the bank, and W. K. Coffin is the cashier of the latter. On or about the tenth of March, 1902, Coffin, acting for the bank, requested Young to transfer to the lumber company, for the benefit of the bank, all of the property embraced in the mortgages, together with certain other property. Pursuant to such request, Young did, on or about the tenth of March, 1902, transfer, by absolute bills of sale, to the lumber company, all of the property described in the mortgages, and other saw logs owned by him. The property transferred was reasonably worth the sum of $35,000. Immediately on the execution of the bills of sale, the lumber company, acting pursuant to the directions by and in behalf of the bank, took possession of the property transferred, and thereafter sold the same and applied the proceeds to the payment of the indebtedness secured by the mortgages. At the time the bills of sale were made, the lumber company and the bank thought the property transferred constituted all of the available assets of Young, and that the result of such transfer and the appropriation of the proceeds thereof would result in the other creditors of Young losing all of his indebtedness to them. The lumber company, acting as vendee of said property, was in reality acting as trustee for the bank, and made such pretended purchase with the understanding and agreement with the bank and Young that it would account to the bank for the proceeds of the property transferred to the amount of his indebtedness, and that any sums realized in excess of his indebtedness should be paid to Young. The bills of sale were not executed in compliance with the statutes of the state. Except as to the agreement

Page 204 U. S. 525

to pay said indebtedness, no consideration was paid by the lumber company for the property, and at the time of the transfer of the property, nothing was paid to Young therefor. By reason of said transactions, the bank, within four months, appropriated to the payment of its claims substantially all of the property of Young, which said time was and has been ever since worth $35,000. There is no other property in the possession of the trustee, belonging to Young, out of which his other creditors can be paid.

The bank demurred to the complaint on the following grounds: the court had no jurisdiction of the subject of the action; the trustee had no legal capacity to sue, in that the complaint did not allege that authority or permission was given him to bring suit; defect of parties, in that Young and the lumber company were not made parties, and that the complaint did not state a cause of action. The demurrer was overruled, and the bank, availing itself of the permission granted, filed an answer, in which it admitted its corporate character and that of the lumber company, and the execution of the mortgages and the bills of sale, and that the instruments were not executed in the manner provided by the statutes of the state. It denied all the other allegations of the complaint, and alleged that a portion of the proceeds of the sale of the property was paid to the bank to discharge valid and existing liens which it held against the property. And it alleged that the mortgages were given for a good and valuable consideration, and that neither of them nor the payments to the bank were made or received for the purpose of giving the bank a preference over other creditors of Young, "contrary to the provisions of the bankruptcy laws," and

"that, prior to the commencement of this action, the plaintiff commenced an action in this Court against said Waters-Clark Lumber Company to recover from said Waters-Clark Lumber Company the purchase price of logs and other material sold by said Young to said Waters-Clark Lumber Company, and thereby elected to treat and consider said contract between

Page 204 U. S. 526

said Young and said Waters-Clark Lumber Company as legal and valid, and elected to look to and hold the said Waters-Clark Lumber Company, instead of this defendant, as liable to said trustee for all sums of money which the said plaintiff may be entitled to recover on account of the transactions mentioned in plaintiff's complaint."

Questions were submitted to the jury covering the issues in the case, except the value of the property, which, by stipulation of parties, was reserved for the court. The jury, in response to the questions, found that, at all the days mentioned in the complaint, the property transferred at a fair valuation was insufficient to pay Young's debts; that the lumber company, acting for the bank and pursuant to the arrangement between it and the bank, took the legal title to the lumber and logs for the benefit of the bank under an agreement with it and Young to account to the bank for a portion of the proceeds; that it was the intention of Young, by the execution of the mortgages and the transfer of the property, to give the bank a preference, and that the bank and officers and agents had reasonable cause to believe that Young intended to give it such preference and to enable it to obtain a greater percentage of its indebtedness than any other of his creditors of the same class would be able to obtain.

The court found that the lumber which was included in the bank's mortgage was worth $3,452.85, and that a note for that sum and value was given by the lumber company to Young and by him transferred to the bank; that the Cadott logs, included in the mortgage and sold by Young to the lumber company, were worth $10,077.84; that the up-river logs not included in the mortgage, but sold to the lumber company by Young, were worth $11,055.84, and that a note which was given as the net proceeds of the sale of both quantities of logs over and above certain labor liens was worth $2,508.14. This note was given by the lumber company to Young and transferred by him to the bank. The trustee contended in the trial court that he was entitled to recover

Page 204 U. S. 527

for the entire value of the logs and lumber, and that no credit should be allowed the bank for the sums paid by it to discharge certain liens on the property for labor claims and unpaid purchase money. The court rejected the contentions and gave judgment for the trustee in the sum of $6,254.99. In this sum was included the value of the notes.

The assignments of error are that the supreme court erred in the following particulars: (1) in determining that the complaint stated a cause of action; (2) in determining that the bank was liable for the value of the logs and lumber to the extent of the chattel mortgage interest of the bank therein; (3) in determining that the bank was liable for having received a preference contrary to sections 60a and 60b of the Bankrupt Act of July 1, 1898, as

"a portion of its chattel mortgage interest in said logs, the sum of $1,335.62 as the proceeds of the sale of the portion of said logs known as the 'up-river logs,' on which logs said defendant never held any chattel mortgage, and which logs were never transferred to said defendant;"

(4) in determining that the bank was liable for the value and moneys it received as a preference, although the trustee had not elected to avoid such preference by bringing suit to recover the same, and had not elected to avoid such preference in any manner; (5) and in holding that, in determining a question of preference, it was immaterial, under the Bankrupt Act, whether the bank and the other creditors were of the same class, and in refusing to reverse the judgment because of the error of the circuit court in charging the jury that all of the creditors were of the same class; (6) in its construction of the Bankrupt Act in the following particulars: (a) in holding that a transfer made within four months of the bankruptcy proceedings, which enabled a creditor to obtain any portion of his debt, constituted a preference; (b) that, although the effect of the transfer in question did not operate to give the bank a greater percentage of its debts than other creditors of the same class, such transfer constituted a preference; (c) in determining,

Page 204 U. S. 528

by such rules of construction of the Bankrupt Act, that the evidence was sufficient to establish that the bank had reasonable cause to believe that a preference was intended; (7), (8), (9) in holding that the bank was liable for the full value of the preference received in an amount in excess of what was necessary to pay all the other creditors of the bankrupt, and claims of fictitious creditors and claims of creditors who had themselves received preference, and in not limiting the recovery to such sum as would be sufficient to pay the claims of creditors whose claims were provable; (10), (11) in affirming the judgment against the bank, and not rendering judgment for it.

Page 204 U. S. 531

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