Morey v. Milliken , 86 Me. 464 ( 1894 )

Haskell, J.

Morey & Company proved their debt in insolvency against their insolvent debtor’s estate to the amount of $134,815.07. To this proof objections were filed by other creditors that Morey & Company had received a preference in fraud of the insolvent law.

By an agreement in writing between Morey & Company and the assignees, approved by the judge of insolvency, it was stipulated that a fair value of the amount of security received should be considered $53,860.85, and that the same, together with rebates of interest amounting to $637.53, in all $54,498.38, should be deducted from the whole claim, and that the balance, $134,815.07, might be proved upon which a dividend should be paid.

In the insolvent court the objections were sustained and the proof disallowed. An appeal was taken to the court below where the case was heard and decided, and the decree of the insolvent court reversed, and the proof allowed. The case comes up on exceptions.

The insolvent law, E. S., c. 70, § 29 provides: "A person who has accepted any preference, knowing that the debtor was insolvent or in contemplation of insolvency, shall not prove the debt on which the preference was given, nor receive any dividend thereon, until he sui’renders to the assignee all property, money, benefit or advantage received by him under such preference.”

Under this statute, knowledge by the creditor of the debtor’s insolvency or contemplated insolvency is made a condition precedent to the rejection of his claim upon which he may have received security. The fact of knowledge is made vital and must appear in order to reject-a claim. It must be determined, too, like any other question of fact, from the evidence in the case. It may be inferred from a variety of other facts that are proved, after giving to each its proper legal significance. For instance, security taken out of the usual course of business has a strong legal significance, and, unexplained by other facts and circumstances, might be considered sufficient in law to show knowledge, but when explained by other facts, as by proof of solvency, Dutcher v. Wright, 94 U. S. 557, or facts that completely destroy its meaning in the mind of the recipient, it could not have that effect. The various facts shown in the case must each be considered, giving to each one its proper significance, and then, after properly weighing each element, the resultant fact becomes apparent.

The court below heard this case and filed a decision finding-various facts upon which the decision rests. The controlling-fact so found relates to the fact of knowledge of the debtor’s insolvency or contemplated insolvency, by the creditors, at the time they received security claimed to be a preference. It is as. follows:

" I find . . that said Morey & Company, when they accepted said securities [those claimed to work a preference], did not know that said Denison Paper Manufacturing Company [the insolvent] was insolvent or in contemplation of insolvency.”

This finding of fact is a resultant fact to be inferred from other facts and circumstances, and must be held conclusive unless shown to be ex-roneous in law.

Morey & Company’s debt was $189,313.47. As security they held certain xxotes, assets and merchandise. Oxx January 20, they wrote their debtors, as near, as can be gathered fx-orn the evidence,— the letter was xiot produced,— calling their attention to the dishonor of cex-tain of their notes, and reminding them that, "unless they attended to the busixxess mox-e promptly when they became due we would wind up the whole business , . . would stop.” Deceiving no reply, Morey & Company telegraphed Mr. Denison to come to Boston and received answer that he was unable to go but would write. He did write on the first of February, inclosing the assignment of various accounts and of the merchandise on hand, manufactured paper, and saying, among other things : "The assigned accounts is several thousand dollars short, and it has occurred by shrinkage in the price of paper, and paper rejected and returned, and discounts on lots retained, etc. We turn over all we can to cover the same.” This is the preference complained of.

The letter also stated: "Your dispatch was received and in confirmation of reply to same I wrrote you to say that we have concluded, after a careful consideration of your letter of January 20, to cease operations and let the creditors of the Denison Paper Manufacturing Company say what course, if any, we shall pursue in the future. I am aware that it will be a very uncomfortable position to place you in, as well as many others, but I cannot stand up under the load I have been carrying any longer and am unable to go to Boston for the present. I enclose you a bill of sale of paper on hand and have covered all of the assigned accounts that lies in my power. . . . We wish we could prevent this calamity but we see no relief amid present combination. We have as yet done nothing to precipitate this matter, and shall be at home during the balance of the week, but the amount we have to pay Friday will settle the matter, if no provision is made to protect same.”

These extracts wore written on Tuesday. One of the firm of Morey & Company went immediately to Mechanic Falls, the debtor’s place of business, examined into its affairs, exercised the right of stoppage in transitu and giving no further assistance, the debtor’s paper went to protest Friday.

At the trial the defendants claimed that these letters w'ere notice to plaintiffs of their debtor’s insolvency, and, in lawr, worked knowledge of the same. It is plain enough that the letters conveyed information of the debtor’s insolvency, and alone, without evidence to control their meaning and import, would sustain the defendant's contention and make the finding of the court below erroneous in law.

In this connection it is well to consider the meaning of the statute phrase, "knowing that the debtor was insolvent or in contemplation of insolvency.”

I. Of the meaning of the word insolvent or insolvency. It is not always used in the same sense. "It is sometimes used to denote the insufficiency of the entire property or assets of an individual to pay his debts, This is its general and popular meaning. But it is also used in a more restricted sense, to express the inability of a party to pay his debts as they become due in the ordinary course of business.” Toof v. Martin, 13 Wall. 47. The latter is the commercial use. It indicates an inability to continue business in the ordinary way ; an inability to meet business obligations as they mature ; an inability to keep one’s credit good so that his commercial promises bear upon their face an assurance that they will be met as they, mature.

It is also the use adopted in all bankrupt and insolvent laws, when applied to persons in commercial pursuits, where provision is intended for the liquidation of business interests, when they can no longer continue in the ordinary course, securing to the existing creditors an equal division of the assets before they shall be wasted and frittered away in a hopeless struggle, under conditions that compel disaster in the end.

In the statute phrase under consideration, the word insolvent or insolvency, when applied to the insolvent, a manufacturing corporation engaged in a mercantile business, has the same meaning and significance as in § 48 of the same chapter relating to fraudulent preferences, where its meaning has already been considered and defined in the case of an insolvent business corporation, viz : an inability to meet maturing demands in the ordinary course of business. Clay v. Towle, 78 Maine, 89. The same meaning as in the late bankrupt law, viz : inability to pay his debts in the ordinary course of business as men in trade usually do, and such must be the conclusion even though his inability be not so great as to compel him to stop business. Wager v. Hall, 16 Wall. 599 ; Buchanan v. Smith, 16 Wall. 308; Butcher v. Wright, 94 U. S. 557. And the same as in the Massachusetts insolvent law, Vennard v. McConnell, 11 Allen, 562 ; Barnard v. Crosby, 6 Allen, 331 ; Lee v. Kilborn, 3 Gray, 594 ; Holbrook v. Jackson, 7 Cush. 136 ; Thompson v. Thompson, 4 Cush. 127.

II. Of the meaning of the word knowing or knowledge. It should be noticed that the word knowing is used in the section 29, now under consideration, instead of the phrase, "having reasonable cause to believe,” used in § 52, relating to fraudulent preferences, and in the late bankrupt law and in most of the other State insolvent laws. " Having reasonable cause to believe,” is defined by our court in the language of the Supreme Court in Grant v. Nat. Bank, 97 U. S. 80, to mean : "It is not enough that a creditor has some cause to suspect the insolvency of his debtor; but he must have such knowledge of facts as to induce a reasonable belief of his debtor’s insolvency in order to invalidate a security taken for his debt. ... A man may have many grounds of suspicion that his debtor is in failing circumstances, and yet have no cause for a well-grounded belief of the fact. He may be willing to trust him further; he may feel anxious about his claim and have a strong desire to secure it, and yet such belief as the act requires may be wanting.” King v. Storer, 75 Maine, 63. That definition is, "knowledge of such facts as to induce a reasonable belief” of the resultant fact, insolvency ; hardly short of knowing it.

In Knapp v. Bailey, 79 Maine, 195, the question was whether a grantee had actual notice of an unrecorded deed. Actual notice means knowledge. And the court says: "The decided preponderance of authority supports the position that the statutory ' actual notice ’ is a conclusion of fact capable of being established by all grades of legitimate evidence.” Knowledge must be proved in the same way or in many cases not at all.

The court.further says in the same case: "If a party has knowledge of such facts as would lead a fair and prudent man, using ordinary caution, to make further inquiries, and he avoids the inquiry, he is chargeable with notice of the facts which by ordinary diligence he would have ascertained. He has no right to shut his eyes against the light before him. He does a wrong not to heed the signs and signals seen by him. It may be well to conclude that, he is avoiding notice of that which he really believes or knows. Actual notice of facts which, to the mind of a prudent man, indicate notice is proof of notice. . . . '1 cannot dare to know that which I know.’”

"Having reasonable cause to believe.” The criterion made in section 52 for determining the validity of a preference as defined by our court is almost, if not quite, identical in meaning with the word " knowing ” made by section 29 a criterion for receiving or rejecting a creditor’s proof of a debt upon which he may have received a preference. And there are many reasons why they should be considered identical in meaning. The taking of a preference does not forfeit the right to prove the debt, as under some bankrupt laws. It only inhibits the proof until the preference shall be surrendered. When surrendered, the debt becomes provable. Ext tempus penitenlice. Until the preference be surrendered, the debt cannot be proved. We see no reason why a preference may not be surrendered at any time, before the debt be finally disallowed, and the debt be proved.

It seems reasonable that the legislature should have intended only to prohibit the proof of a debt until an invalid preference shall be surrendered. Why make a debt provable for the balance over a preference, and then make the preference recoverable by the assignee leaving the creditor with dividends on the balance of his debt only ? Why make it possible for him to lose dividends on the amount supposed to have been paid by the preference after he shall have lost it ? The statute prohibits his proof only, until he shall have surrendered the preference.

Both sections should be construed to have the same meaning, and be held to inhibit the proof of a debt, until a preference, invalid under the statute, shall have been surrendered. Such construction would practically be as favorable to the creditor as the other and would diminish litigation, as one trial would be likely to settle the right to the security and of proving the debt.

What then are the facts of this case as bearing upon the legal import of the letters claimed to work knowledge to plaintiffs of the debtor’s insolvency? The plaintiffs were merchants in Boston. The insolvent, a manufacturing corporation in Maine. The Denisons were its managers. In 1882, they, being in financial trouble, applied to the senior plaintiff for "advice and counsel.” He aided them in arranging a settlement with their creditors, and also afterwards arranged that his firm should furnish them funds by indorsing their paper at two per cent taking security on their accounts. They had previously been selling their paper through a commission house paying a commission of five per cent with a gu aranty of two and one half. Morey says : " They wanted to know if I would not make the advances at a less rate and they would sell the paper. I asked them how they would secure me in that way, and they said they couldn’t secure me except in the assignment of the accounts, but 1 would have to trust to their integrity, but under no circumstances, aiding them as I had done, would they take advantage of the position I had occupied. A. T. Denison came to my office with tears rolling down his cheeks, said that it had saved them, and that I never should lose a dollar under any circumstances. I knew I took a risk, but I could not conceive it possible, when I was pulling a man out of the water to save him from drowning, he would put his hand around and take it out of my pocket.”

Advances were continued until shortly before the failure when they aggregated about $189,000. Trial balances were forwarded to plaintiffs until July 1, 1886. That one is not produced. The one prior to it, January 1, 1886, is produced. It shows:

Beal estate and new machinery as resources, $427,025.53

Accounts and material, 142,053.67

Total, $569,079.20

Debts outstanding, $411,792.64

Surplus, 157,286.56 $569,079.20

From this statement it appears that the debts exceeded the quick assets (accounts and material) $269,778.97. The next trial balance produced, which Walter Morey testifies was not more unfavorable than the last one received, taken from the books in June, 1887, shows liabilities in excess of quick assets amountingto $512,323.33. On January 20, 1887, plaintiffs wrote the letter before referred to calling for more prompt attention to the payment of their notes and in answer came the letter of February 1, before recited, inclosing the preference complained of. This preference included all their accounts and merchandise on hand. A transaction that gave expression to their straightened condition. With it was express notice of their inability of themselves to meet their paper maturing three days after-wards. The plaintiffs then held all the available quick assets of their debtors and knew that their liabilities to other creditors amounted to above $200,000. Their own claim was nearly that sum. To be sure, the debtors held valuable real estate, but that could not be considered available to pay commercial paper about to fall due. The plaintiffs must have known that, without their help, the debtor’s business would cease, as they were informed it would in the letter to them, inclosing the preference complained of. All the facts in the case tend to confirm the statements in the letter of February 1, unless it be the testimony of plaintiffs themselves, who say that they did not know that their debtors were insolvent. Of course, all members of the firm, some of whom did not take an active part in the management of the firm's business, would not necessarily have the same plenary knowledge that others would be expected to have. Nor is it necessary that they should, in order to charge the firm with knowledge. As one member of a partnership is agent for the others in the firm business, so the knowledge of one partner is knowledge of the partnership.

The senior plaintiff, Edwin Morey, testified relating to the information contained in the letter of February 1: "I took the letter and telegram and put them together and I thought Adna was sick at home and blue and thought I was not going on with the help and that he had sent that dispatch, written that letter— I didn’t consider at that time but what he would come through with it all right. Thad supposed that they had a large surplus, not valuing the materials at any price it would be likely to bring. I saw this trial balance they would send to me from time to time, and when they were first sent to me they put their balances there to what it stood on the books, but I objected and insisted that the plant should be cut down to $250,000. My impression ivas that if the property brought in accordance with their trial balances (hey could pay in full, it is only an impression ; when I got that telegram I thought that he didn’t know how to move and that he was sick and blue at home.”

This indicates that the solvency of which this witness speaks ivas an ability, on liquidation, to pay in full. And he adds : "It is only an impression.” The witness does not distinguish between commercial insolvency, the inability to continue business in the usual course, and actual insolvency on final liquidation. He says : " I thought Adna was sick at home and blue, and thought I was not going on with the help [advances] and that he had sent that dispatch, written that letter. — ” In the letter he was told," We have concluded, after a careful consideration of your letter of January 20 [calling for more prompt payment of commercial paper], to cease operations and let the creditors of the Denison Paper Manufacturing Company say what course, if any, we shall pursue in the future. . . . The amount we have to pay Friday will settle the matter, if no provision is made to protect the same.” Edwin Morey received that letter on Tuesday. A member of his firm immediately went to the debtor’s place of business, examined its condition, and did not help to prevent the paper maturing on Friday from dishonor, but submitted to the condition of affairs of which he was told by the letter to be inevitable. He knew the debtors were commercially insolvent, unable to continue in business for a single hour without the aid of his firm ; that, after further investigation, he withheld. This letter, too, contained assignments to him of all the debtor's quick assets, a transaction out of the usual course of business, and, to a commercial man, strong proof of the tale of woe that the letter apprised him of. The information in the letter and the preference that it brought to plaintiff’s hands were contemporaneous. The one plainly said I am insolvent, and the other invested him with all the available security within the debtor’s power. There is no evidence in the case that controls this transaction or tends to control it, or explains its legal meaning. It is not contended that the debtor was not actually insolvent. The creditor knew its business and its commercial credit, had complained of its inattention to maturing paper, was informed of its inability to further continue business and that the creditors must decide what course to pursue. These facts gave a reasonable cause to believe that the debtor was insolvent, carried conviction that it must be so, and under this statute worked knowledge' of the fact. There is no evidence in the case tending to show that the statements in the letter were untrue, and time has thoroughly verified their truth.

It is too well settled to contend that findings of fact by a presiding justice can be reviewed in any case where an appeal is not given. The doctrine in such cases is well stated in Coolidge v. Smith, 129 Mass. 556. "The judge who presided at the trial in the court below was in a position in which he was required to exercise the functions of both judge and jury. His conclusions as to the weight and sufficiency of the evidence, and the credit which he ought to give to the witnesses, are binding upon us and are not open to revision. Forsythe v. Hooper, 11 Allen, 419. If there was any evidence which could properly have been submitted to a jury, and upon which, if believed by them, they could legally find a verdict for the plaintiffs, the verdict could not be set aside as matter of law. Heywood v. Stiles, 124 Mass. 275. The finding of the judge in this case stands in the same position as if it had been the verdict of a jury.” The same doctrine is laid down in Pettengill v. Shoenbar, 84 Maine, 104.

In the case at bar, the creditors received security upon an existing debt with express notice from their debtor, by a letter bringing the security to their hands, that their debtor was commercially insolvent. They therefore took the security charged with the notice of the debtor’s insolvency. They cannot say they did not know whether the information was true or not. If they received the security coupled with notice that it would give them a preference over other creditors and elected to hold it, they should be charged with taking it under those conditions. It was tendered as a preference under the insolvent law, and when they elected to so receive it, they received it as tendered.

The creditors received security, being charged in law with notice, actual notice, that worked knowledge of their debtor’s insolvent condition. There is no evidence in the case that does or can explain a way the legal aspect of the transaction. The finding, therefore, of the presiding justice, that they did not know of their debtor’s insolvency, is an erroneous decision of the legal inference to be drawn from the facts of the case, and is error in law. When one inference only can be drawn from existing facts, it is a matter of law. Where the inference is doubtful, a matter of fact. Lasky v. C. P. R. Co. 83 Maine, 461.

It is claimed that the supposed preference was but an exchange of securities. The facts are, certain accounts and, perhaps, some merchandise had previously been assigned to the plaintiff's as security for their advances. They neither took possession of the merchandise, nor notified the debtors of the assignment of the accounts, but left both under the control of the insolvent, and it used or sold the merchandise and utilized the accounts by creating offsets and collecting balances, &c., whereby the plaintiff's’ security was lost. But they had no security. They had a potential right to security. The assignments were not a-mortgage. They could create a pledge where control of the thing assigned was secured, but until that was done the contract was executory. Walker, v. Staples, 5 Allen, 34 ; Thompson v. Dolliver, 132 Mass. 103 ; Shaw v. Silloway, 145 Mass. 503 ; Copeland v. Barnes, 147 Mass. 388.

An exchange of securities of equal value works no prejudice" to the creditors of an insolvent debtor and, therefore, should not be held void as a preference. Cook v. Tullis, 18 Wall. 332; Clark v. Iselin, 21 Wall. 360; Burnhisel v. Forman, 22 Wall. 170; Sawyer v. Turpin, 91 U. S. 114. If larger security be given in the exchange, the excess can only be attacked as a preference. Hutchinson v. Murchie, 74 Maine, 187 ; Robinson v. Tuttle, 2 Hask. 76.

But there must be an exchange. The replacing of securities-already lost is not an exchange. It is the giving of new and-further security, thereby diminishing the insolvent’s estate to the extent of the new security, a result exactly the reverse of an exchange.

Nor can the supposed preference be upheld upon the ground that it was given in pursuance of a prior agreement to secure, even if such agreement had been shown. Copeland v. Barnes, 147 Mass. 388; Re McKay, 1 Lowell, 561.

It is claimed that the preference was purged, by agreement of the assignees made with approval of the insolvent court. Early in the insolvent proceedings plaintiffs’proved their claim for $189,313.45. As security they held sundry notes and accounts and parcels of merchandise. They agreed with the assignees to take the security at a fair valuation, and it was agreed that the fair value was $53,860.85, and that a rebate of interest amounting to $637.53, should also be allowed, in all $54,498.38, and that the proof should be correspondingly reduced and stand for dividends at $134,815.07. Upon this amount a dividend of twenty-five per cent has been paid. The agreement is in writing, and the parties differ as to its legal effect. Equity deals with the substance of a transaction regardless of form, and the substance of the transaction was that the plaintiffs should apply their security to the payment of their claim at a fair valuation, a.nd prove the balance. They did so. The assignees parted with all title to the security, and it was applied in payment of the debt. This was all they could agree to do and all they did do. Their action might conclude them but it could not conclude others. Each creditor is given by statute the right to contest the proofs of other creditors, and some creditors have availed themselves of that right in this case, and their contentions must be heard and considered. They have shown a preference, included in the securities of the plaintiffs, to the amount of $11,355.54. Under the statute, until they surrendered this to the assignees, they are debarred from proving their debt. When they do surrender it, they are entitled to have their proof of debt increased by that amount, and would be entitled to receive upon it a dividend of twenty-five per cent to give them a¡n equality with all the other creditors. After giving them credit for this amount, the preference to be surrendered would be $8,516.64.

The injury, therefore, suffered by the defendants on account of the erroneous ruling of the court below, can be measured and exactly determined from the evidence produced before us, as it has all been reported, and, as this cause is of long standing, we think best to finally determine it if possible. If, therefore, the plaintiffs elect to pay the assignees, within thirty days, the sum of $8,516.64 they may increase their proof of debt in the insolvent court by the amount received as a preference, viz $11,355.54, so that the same shall stand proved to the amount of $146,170.61, upon which they may share equally with the other creditors in future dividends, if any are paid, and the exceptions are to bo overruled, otherwise sustained.

Mandate accordingly.