Hackney v. Raymond Bros. Clarke Co.

Pound, C.

This is an action by the plaintiff, as trustee in bankruptcy of one Erlenborn, to recover an alleged preference claimed to have been received by the defendant as a creditor of said Erlenborn. The transaction by reason whereof a preference is alleged to have resulted was, in substance, this: Erlenborn was a retail merchant, and was indebted to several wholesalers, among others, to the defendant. One Kettering bought out Erlenborn, and, as part of the purchase price of the latter’s stock, put in the account of the defendant against Erlenborn, which he had purchased at a discount of 25 per cent.. The principal issues were whether Erlenborn was insolvent at the time of this transaction; whether Kettering and the defendant had reasonable ground to believe him insolvent; and whether the transfer of the account from the defendant to Kettering was an absolute transfer, made in good faith, without any understanding that Kettering was to be protected, and without any agreement or understanding that the account was to be used as part of the purchase price in a contemplated purchase of Erlenbom’s stock, or was merely a colorable device for the purpose of evading the bankruptcy law and enabling the defendant to obtain a preference. The sale took place three months prior to the institution of bankruptcy proceedings, and consequently would be within the terms of the act in case we should hold the transaction amounted to a preference. There were two trials in the court below. At the first trial a verdict was rendered for the plaintiff. A new trial was granted, which resulted in a verdict and judgment for the defendant. The plaintiff has come to this court on error, and complains of the order of the district court granting a new trial after the first verdict, and of its rulings and judgment at the second trial.

A much stronger case is necessary to warrant this court in interfering with a second verdict and judgment on the merits by reason of alleged error in setting aside a prior verdict and granting a new trial, than where a motion for a new trial has been denied. Weber v. Kirkendall, 44 Neb. 766. The new trial appears to have been granted because llie district court was of opinion that one of its instructions at the first trial was erroneous. We think this conclusion was correct, and that the error in the instruction was sufficient to justify its action. Among other things, the jury were instructed that notice of facts sufficient to lead a prudent man to the conclusion that 'a debtor “could not meet his obligations as they matured in the ordinary course of business” was notice of the insolvency of such debtor within the meaning of the bankruptcy act. This was clearly erroneous. Under a former statute insolvency was so defined; but the present act gives a materially different meaning to that term. In section 1 it is provided that “a person shall be deemed insolvent within the provisions of ibis act whenever the aggregate of his property * * * shall not, at a fair valuation, be sufficient in amount to pay his debts.” Manifestly, a person may not be able to meet current obligations and yet his property at a fair valuation may be sufficient to pay his debts. So long as the insolvency of Erlenborn at the time of the transfer was in issue, we can not say this was not prejudicial error. Notice that a debtor has not paid a claim at maturity is not necessarily and conclusively notice of insolvency under the present law. In re Eggert, 102 Fed. 735, 43 C. C. A. 1. As one of the facts relied on was that Erlenborn was not meeting his account with the defendant promptly, this point became very material.

The principal controversy with respect to the second trial turns upon the instructions of the court. The plaintiff contended that the necessary effect of the sale of defendant’s claim against Erlenborn to Kettering was to prefer the defendant, while the defendant contended that it had a right to sell its claim to whom it pleased, the same as any other property, so long as it made an absolute transfer without any intent to evade the bankruptcy law, and without any secret understanding or agreement which would give it such effect. The court took the latter view, and instructed the jury, in substance, that it was a question of fact whether the transfer of the account was absolute and in good faith, or a mere colorable device for the purpose of securing a preference indirectly. Whether or not the defendant had reasonable ground to believe Erlenborn insolvent, and to believe that the purchase of the account by Kettering would operate as a preference, becomes an important question in connection Avith the issue as to the nature and effect of the transaction. The trustee in bankruptcy may recover money paid by the bankrupt as a preference only when the person receiving it had reasonable ground to believe that a preference Avas intended. Such is the language of the statute, and the courts so hold. Pirie v. Chicago Title & Trust Co., 182 U. S. 438. If the creditor has reasonable ground to believe that the debtor is insolvent and the obvious effect of receipt of the money under those circumstances is to give him an advantage over other creditors, he is chargeable with notice of intention to prefer. Pirie v. Chicago Title & Trust Co., supra. A person must be held to intend the obvious results of what he does. Notice that such results will follow is notice of the intention with which the act is done. Johnson v. Wald, 93 Fed. 640; In re Fort Wayne Electric Corporation, 99 Fed. 400. In Johnson v. Wald the court say:

“Where an insolvent debtor transfers to one of his creditors, in payment of his debt, personal property sufficient in value to satisfy the debt in full, his 'intent- to prefer such creditor over his other creditors,’ necessary to make such transfer an act of bankruptcy, will be presumed; the preference being the natural result of the transfer.” Hence, in such cases, the crucial point is reasonable cause to believe the debtor insolvent. Whether a creditor had reasonable cause to believe his debtor insolvent within the purview of section 60 of the bankruptcy act, is a question of fact. In re Eggert, 102 Fed. 735, 43 C. C. A. 1. In determining this question, it is not necessary to find that the creditor actually knew or believed that the debtor was insolvent. He is chargeable with notice of such facts as a reasonable inquiry, in view of the circumstances with respect to the debtor’s condition which were brought home to him, might fairly be expected to disclose. In re Eggert, supra. But a mere knowledege that the debtor has other liabilities, or of circumstances which could operate no further than to create a suspicion of possible insolvency, is not always sufficient. In the Eggert case the circuit court of appeals say:

“The resultant of all these decisions we take to be this: That the creditor is not to be charged with knowledge of his debtor’s financial condition from mere nonpayment of his debt, or from circumstances which give rise to mere suspicion in his mind of possible insolvency; that it is not essential that the creditor shall have actual knowledge of, or belief in, his debtor’s insolvency, but that he should have reasonable cause to believe his debtor to be insolvent; that if facts and circumstances with respect to the debtor’s financial condition are brought home to him, such as would put an ordinarily prudent man upon inquiry, the creditor is chargeable with knowledge of the facts which such inquiry should reasonably be expected to disclose. * * * The only fact brought home to the creditor, and which it is claimed should have aroused inquiry, is that he was somewhat behind in the prompt payment of his obligations. We can not say, as a conclusion of law, that knowledge of that fact standing alone was sufficient to put the creditor upon inquiry. Indeed, it may be said that a majority of merchants absolutely solvent, in the sense in which the term is employed in the bankruptcy act, are not at ail times able to promptly meet their obligations as they mature.”

The same position is taken in Lyon v. Clark, 129 Mich. 381, 88 N. W. 1046. Under these authorities, with which we fully agree, the court was right in refusing to direct a verdict for the plaintiff. The mere fact that defendant’s account was overdue, and that its collector had been seeking to obtain -payment, was not sufficient to charge the defendant with notice of insolvency on the part of Erlenborn, or an intention on his part to make a preference.

With respect to the nature of the transactions between defendant and Kettering on the one hand, and between Kettering and Erlenborn on the other hand, we think the question was peculiarly one for the jury. A creditor will not be permitted to obtain a preference indirectly by transfer of his account, procuring a-third party to loan money to the debtor for payment of such creditor, or other color-able device or transaction intended to evade the provisions of the bankruptcy act. As was said in the case of In re Beerman, 112 Fed. 663, 666. “If transactions of this sort are to be permitted, then, instead of a creditor taking a mortgage himself, when a debtor is in failing circumstances he will get some one else to advance the money, agreeing that the person advancing the money shall suffer no loss, and thereby obtain by indirection a preference Avhich he would be unable to get if he had acted directly Avith the debtor.”

But an absolute transfer of an account against the insolvent debtor, in good faith, to one who afterwards buys the latter’s stock of goods and obtains credit for such account on the purchase price without any agreement or understanding that such use was to be made thereof, or that the purchaser of the account was to be protected by the creditor in any way does not constitute a preference of the creditor to the extent of the money he received on sale of his claim. To construe the bankruptcy act as preventing creditors from disposing of their claims absolutely in good faith, as they undoubtedly may do where the debtor is solvent, would, as the court well expressed it in In re Eggert, supra, “put at hazard many business transactions and make the act oppressive.” In the somewhat similar case of North v. Taylor, 61 App. Div. (N. Y.) 253, 70 N. Y. Supp. 339, a husband gave his own note to his wife for a note which she held against the bankrupt, and then turned in the note to the bankrupt upon the purchase price of the latter’s stock of goods. The evidence did not show that the husband acted as the wife’s agent, or that she was aware of the insolvency of her debtor. It did not appear that she received the proceeds of the transfer to her husband. The court held that the trustee could not recover the amount of the note from the wife, on the ground that she had received a preference. In Lyon v. Clark, supra, another case involving a transaction not unlike that in the case at bar, the court held that the question was one of good faith, and that such a transaction could not be pronounced a preference as a matter of law. We think this must be so clearly. The remedy in case the transaction was bona fide is against the purchaser,of the stock, who received credit on the purchase price for the account so transferred. He, not his assignor, was preferred. In case he had reasonable ground to believe that a preference was intended, the trustee has a cause of action against him. It can not be said that his assignor was preferred unless the.assignment was entered into to evade the bankruptcy-law, Avith some secret understanding or agreement Avhereby the assignor Avas to be protected, or Avas to be a mere figurehead, . Avliile the real and substantial transaction was between the debtor and the assignor. We are of opinion that the instructions of the court are fully in accordance Avith the vieAVS above expressed, and that its rulings in giving and refusing instructions were free from error.

A number of errors are assigned upon rulings on evidence. A schedule of liabilities filed by Erlenborn in the bankruptcy proceedings Avas offered on behalf of the plaintiff, and excluded by the court. This ruling was right. It is not perceived how the schedule could b'e competent evidence on an issue betAveen the trustee and a third person as to the financial condition of the bankrupt three months before. Complaint is made, also, that one of the officers of the defendant Avas permitted to testify as to his intention in making the transfer of the account to Kettering. While a person’s intention is to be determined primarily from Ms acts, where such acts are ambiguous and good faith is in issue, he may testify what his intention was. 1 Greenleaf, Evidence, sec. 462; Sweet v. Tuttle, 14 N. Y. 465; Seymour v. Wilson, 14 N. Y. 567; Starin v. Kelly, 88 N. Y. 418. In the case at bar, the evidence was conflicting upon the issue whether the assignment was absolute and in good faith, or was a mere device to evade the bankruptcy act. The act of assignment, taken by itself, is consistent with either view. Hence it was proper to permit the parties thereto to testify to their intention, and it would have been .error to exclude such testimony. Seymour v. Wilson, supra. The plaintiff produced Kettering as a witness on his own behalf, and subjected him to a severe examination, which, in substance, was a cross-examination. The trial court ruled somewhat strictly at many points in the course of this examination, and complaint is made as to a large number of these rulings. How far, if at all, a party shall be permitted to cross-examine or put leading questions to his own witnesses, where they appear to be hostile or unwilling, is in the discretion of the trial court, and its rulings in such matters will not be disturbed except for manifest abuse of discretion. St. Joseph & G. I. R. Co. v. Hedge, 44 Neb. 448; Welsh v. State, 60 Neb. 101.

Many other assignments of error are referred to in the brief, but they are not argued in such manner as to malee it necessary for us to take them up in detail. This court is not bound to examine questions not so raised in the briefs as to state specifically what is complained of, the reason and basis of the complaint, and the exact portions of the record material thereto. Such, we think, is the fair import of the numerous decisions of this court to the effect that it wall not consider errors not argued in the briefs. We come to the conclusion that these several assignments of error need not be gone over in detail, the more readily, because, from examination of the record, we are of opinion that the instructions of the court and its rulings on evidence were more than usually careful and circumspect, and that the plaintiff bad a fair trial in every way. Tbe evidence is sufficient to sustain tbe verdict, and tbe record discloses no prejudicial error.

1. Bankruptcy Act: Unlawful Preference. A creditor of a bankrupt can not escape the consequences of the bankruptcy act regarding unlawful preferences by assigning his account to a purchaser of the property of the bankrupt under an arrangement whereby such purchaser offers to assume the liability, and satisfy such account contingent upon the purchase of the bankrupt’s property, and where in the sale of such bankrupt’s property, as a part of the consideration, such purchaser agrees to and assumes such liability, and reserves from the purchase price an amount sufficient to satisfy the same.

2. Legal Effect of Conditional Transfer of Account. In such a case the legal effect of the transaction is to appropriate out of the assets of the bankrupt the amount required and used in the satisfaction of such claim by the purchaser assuming the liability, and other essential elements not being lacking, an unlawful preference in favor of such creditor results therefrom.

3. Schedule Admissible in Evidence. In a contest between a trustee in bankruptcy and one sought to be charged as a creditor having received an unlawful preference, the schedule of liabilities filed by the bankrupt in the bankruptcy proceedings is admissible in evidence on. the issue of insolvency as tending to prove the insolvency charged.

4. Hackney v. Hargreaves Brothers, 3 Neb. (Unof.) 676, adhered to.

We therefore recommend that tbe judgment be affirmed.

Barnes and Oldham, CC., concur.

By tbe Court: For tbe reasons stated in tbe foregoing opinion, tbe judgment of tbe district court is

Affirmed.