Walters v. Zimmerman , 208 F. 62 ( 1913 )

KIIXITS, District Judge.

This is an action by the trustee in bankruptcy to set aside as a preference, under section 60, par. “b,” of the Bankruptcy Act (Act July 1, 1898, c. S41, 30 Slat. 562 [U. S. Comp. St. 1901, p. 3445]), as amended by Act June 25, 1910, c. 412, § 11, 36 Stat. 842 (U. S. Comp. St. Supp. 1911, p. 1506), a certain mortgage, among others given by the bankrupt, to George H. Marsh.

It appears that at the time of the giving of the mortgage, which was within four months of the filing of the involuntary petition in bankruptcy, the mortgagor, I,. F. Zimmerman, was, individually and as a partner in the Zimmerman Music Company, insolvent. The partnership was indebted to the First National Bank of Van Wert in the sum of $19,117.99, for which the hank held the notes of the partnership and government bonds, personal property of Mr. Zimmerman, in the amount of over $6,000. The partnership had always been borrowers from the bank, and its indebtedness had been steadily increasing until further credit had been refused by the cashier.

On the date of the mortgage. Mr. Marsh loaned to Zimmerman $12,-000 upon real estate security; the lien being inferior, as to one parcel, to a $5,000 loan effected in another place. The proceeds of the mortgage were immediately placed to the credit of the Zimmerman Music Company in the bank and checked out, to the complete liquidation of the partnership’s debt to the bank; the latter having, by arrangement with Mr. Zimmerman, taken the government bonds at a fixed price regarding premium to be applied to the reduction of the indebtedness. The result of this transaction was to leave a balance of $2 in the hank to the credit of the partnership, which was at that time very largely indebted to other persons and firms.

The evidence shows that the value of the property conveyed by the mortgage was not very greatly iri excess of the face of the two mortgages thereon, namely, $17,000; some of the witnesses asserting that no equity remained, others that in their judgment an equity of $3,000 to $5,000 remained. Subsequent dealings with two parcels of the property within a few months by way of sales tended to show that the equity above the mortgages was very slight, if any existed.

Mr. Marsh at the time of this transaction was president of the bank. He knew that the money which he was furnishing was to be used to apply on the bank’s claim. Tie was an old acquaintance and friend of Zimmerman. The circumstances indicate, in the court's judgment, very clearly that but casual inquiry on 1ns part (such conversations and investigations as ordinary alert business men, especially in the banking business in small cities of the character and size of Van Wert, usually make) would have quickly developed knowledge to him that Zimmerman was insolvent and likewise the partnership.

[ 1 ] The duty of making inquiry and the responsibility to be charged with all the knowledge which inquiry, if made, would have brought are propositions too well settled in cases of this character to need citation of authority; the only question open for consideration being whether, Mr. Marsh, at the time of the making of the mortgage, not being a creditor, his mortgage could be avoided on the ground of his knowledge that its proceeds were to be used to wipe out the antecedent debt held by his bank.

[2] In the judgment of the court, the case is settled by applying the principles discussed in Newport Bank v. Herkimer Bank, 225 U. S. 178, 32 Sup. Ct. 633, 56 L. Ed. 1042. The action in the case before us is founded upon the following provision of section 60, par. “b,” of the Bankruptcy Act:

“If a bankrupt shall have * * * made a transfer of any of his property, and if, at the time of the transfer, * * * and being within four months before the filing of the petition in bankruptcy * * * the bankrupt be insolvent, and the * * * transfer then operate as a preference, and the person' receiving it or to be benefited thereby or his agent acting therein, shall then have reasonable cause to believe that the enforcement of such * * • transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value from such person.”

For the purpose of this case, emphasis should be laid upon the fact that the language quoted above allows that the person taking the transfer, but who does not hold the preferred debt, may be affected by constructive knowledge that a preference will result. In the case cited the court holds that to constitute a preference under the Bankruptcy Act, having reference to that portion of the act which we quote, it is not necessary that the transfer be made directly to the creditor; it may be made to another for his benefit; and, if preferential, circuity of arrangement will not avail to save it. This is but a slight paraphrasing of the language of Justice Hughes’ opinion in the case, at 225 U. S. 184, 32 Sup. Ct.. 635 (56 L. Ed. 1042). Continuing, he says':

“It is not the mere formal method of the transaction that the act condemns but the appropriation by the insolvent debtor of a portion of his property to the payment of a creditor’s claim so that thereby the estate is depleted and the creditor obtains an advantage over other creditors.”

We are cited to a very recent decision of the Supreme Court (Van Iderstine v. National Discount Co., 227 U. S. 575, 33 Sup. Ct. 343, 57 L. Ed. 652), as sustaining the defense to the trustee’s action. Attention, however, is called to the language of the opinion on page 583 of 227 U. S., page 345 of 33 Sup. Ct. (57 L. Ed. 652):

“Cases, under the present statute, like In re Beerman [D. G.] 112 Fed. 663, relied on by the trustee, relate to transactions in which the mortgagee was practically the representative of the preferred creditor and where consequently the conveyance was as much subject to attack as though it had been made directly to him. But here the discount company was not a creditor of Fellerman & Son and had no relation with the person to whom the money was paid. National Bank of Newport v. National Bank of Herkimer, 225 U. S. 178 [32 Sup. Ct. 633, 56 L. Ed. 1042]. The transfer, therefore, was not a preference to the discount company and could not be set aside without proof that it knew that Fellerman not only intended to pay some of his creditors but to defraud others.”

It seems from this language that in this latest case the Supreme Court distinguishes the facts of that case from the facts in the case in 225 U. S'., and in so doing reaffirms the proposition of Justice Hughes in the latter case.

The cases of Lumpkin v. Foley, 29 Am. Bankr. Rep. 673, 204 Fed. 372, and Johnson v. Dismukes, 29 Am. Bankr. Rep. 686, 204 Fed. 382, Jtrom the Circuit Court of Appeals, Fifth Circuit, while upon another section of the act, yet furnish considerable support to the position which we take.

It is well suggested that, to permit these mortgages to stand, made as they are to a person who has at least constructive knowledge of the insolvency of the mortgagor and who is the executive officer and head of the creditor who obtains a preference, would be to furnish an easy opportunity to avoid the provisions of section 60 of the act.

Speaking of a situation very similar to this,’ Judge Newman, in Re Beernian (D. C.) 112 Fed. 663, at page 666, says:

"li 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 toss and thereby obtain by indirection a preference which he would be unable to get if he had acted directly with the debtor, provided, of course, that the debtor within four months thereafter becomes a bankrupt.”

The fact that Mr. Marsh, as far as the record shows, took no indemnity from the creditor, thereby making the instant case more closely analogous to the Beerman Case, in our judgment, is amply offset by the other fact that Mr. Marsh was the nominal executive officer of the bank and that all the circumstances attending the transaction indicate that his interest as such was the motive actuating his taking the mortgage. There is no reason to suspect from the evidence before us that as a prudent business man he could have regarded the loan as a very safe one; the debtor being an aged man in failing circumstances, of which the bank’s own records furnish full evidence, and the security being insufficient to warrant the feeling that the margin in the equity would protect accumulating interest and costs of foreclosure.

The decree in this case should be for the plaintiff.