Continental & Commercial Trust & Savings Bank v. Breen & Kennedy

Mr. Justice Gridley

delivered the opinion of the court.

Section 60a of the Bankruptcy Act provides, in substance, that a person shall be deemed to have given a preference if, being insolvent, he has within four months before the filing of the petition made a transfer of any of his property, and the effect of such transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. Section 60b of said Act, in force in 1909, provides that “if the bankrupt shall have given a preference and the person receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee, and he may recover the property or its value from such person.”

The evidence introduced by the plaintiff (the trustee) in this case showed that the bankrupt, Jones, within four months before the filing of the involuntary petition in bankruptcy against him and while he was in fact insolvent, made two payments aggregating the sum of $5,437.50, out of his assets, to the defendant Andrew J. Graham, doing business as Graham & Sons, bankers, to take up five notes previously given by him, and it was stipulated, in substance, that the effect of such payments enabled Graham, or the person benefited, to obtain a greater percentage of his debt than other of Jones’ creditors of the same class.

Counsel for plaintiff contend, in substance, that the trial court erred in instructing the jury, at the close of plaintiff’s evidence, to find the issues in favor of both defendants and in entering judgment against the plaintiff, (1) because the evidence tended to prove that Jones gave a preference and that both Graham, who received the preference, and Breen & Kennedy, who was benefited thereby, had reasonable cause to believe that a preference was intended; and (2) because the action was one in tort, and the evidence tended to prove that Jones gave a preference and that either Graham or Breen & Kennedy had reasonable cause to believe that a preference was intended. As to the second contention, counsel state in their reply brief: “The question turns on the form of the action. If the action was an action in contract and this court is of the opinion that the appellant failed to make out a case against one appellee, this court will affirm the judgment of the trial court in favor of both appellees.”

In order to recover in this case, the trustee was required to prove by sufficient evidence not only that the bankrupt had made a payment which had the effect of a preference, as defined in said section 60a, but also that the defendants had reasonable cause to believe that a preference was intended. Debus v, Yates, 193 Fed. 427; Kimmerle v. Farr, 111 C. C. A. 27, 189 Fed. 295. When a debtor pays, and a creditor receives, the amount of a just debt, the natural presumptions are in favor of the good faith of the transaction, and the burden of proof to show that the creditor had reasonable cause to believe that a preference was intended is upon the trustee. Tumlin v. Bryan, 91 C. C. A. 200, 165 Fed. 166, 168; Getts v. Janesville Grocery Co., 163 Fed. 417,420; Chisholm v. First Nat. Bank of Leroy, 176 Ill. App. 382, 390. The creditor must have reasonable cause to believe (1) that the debtor was in fact insolvent and (2) that the debtor intended by the payment to give him a preference. Counsel for plaintiff contend that the test is whether the facts and circumstances within the knowledge of the creditor are sufficient to put him on inquiry to ascertain whether the debtor was insolvent and that the payment was intended as a preference. We do not so construe the act. In Blankenbaker v. Charleston State Bank, 111 Ill. App. 393, 394, it is said: “The creditor is bound only by the information he has at the time he receives payment and is not obliged to trace to the ultimate any suspicious circumstances that may exist within his knowledge, to ascertain whether such payment would be void within the law. Neither is it enough that a creditor has some cause to suspect that payment to him was intended as a preference.” See also Grant v. National Bank, 97 U. S. 80; Powell v. Gate City Bank, 178 Fed. 609, 617; Tumlin v. Bryan, supra. And the reasonable implication of the statute is that the debtor himself must have intended to give a preference. Tumlin v. Bryan, supra; In re First Nat. Bank of Louisville, 84 C. C. A. 16, 155 Fed. 100, 103; Hardy v. Gray, 75 C. C. A. 562, 144 Fed. 922, 925. And “a presumption of law that the debtor intended to give a preference does not arise from the fact alone that he knew himself to be insolvent. * * # It will often, if not generally, happen that a person, though in fact insolvent, will, while continuing his business in the usual way, make payments without a thought of disparagement of other creditors and with confidence in his ability to pay them all. * * * Neither is the creditor’s belief that' the debtor is insolvent in itself equivalent to a belief that he intends a preference. * * # The creditor * * * ‘may share in the confidence of his debtor, and may well suppose that the debtor while paying him his debt in the common course of business is acting without any purpose of giving special favor. ’ ” Kimmerle v. Farr, 111 C. C. A. 27, 189 Fed. 295, 300.

After a careful consideration of the evidence we are of the opinion that plaintiff did not sufficiently prove that when Jones made said payments to Graham in January and February, 1909, he. intended to give a preference, or that Graham, when he received those payments, had reasonable cause to believe that a preference was intended. Though Jones may have known he was insolvent at the timé, the evidence shows that when he made said payments he, relying on his landlord’s promise to rebuild the burned premises, expected to re-establish his former large restaurant business there, and wanted to keep his credit good with Graham and stop the running of interest on said notes. And the evidence does not tend to show that at the time of the receipt of said payments Graham, or any one connected with his bank, knew of Jones’ actual financial condition, or had made any investigation thereof subsequent to October, 1907. Indeed, the evidence shows that Graham did not personally see Jones or communicate with bim from the time of the fire until after the filing of the bankruptcy petition. The fact that Graham may have known that the February, 1909, payment included three notes not yet due is not conclusive that Graham had reasonable cause to believe that a preference was intended. Sparks v. Marsh, 177 Fed. 739, 743.

It is the law that an indorser or guarantor of a note of a bankrupt is a creditor within the meaning of section 60b of the Bankruptcy Act, so as to charge him with a preferential payment made to the holder of the note (Swarts v. Siegel, 54 C. C. A. 399, 117 Fed. 13; Paper v. Stern, 117 C. C. A. 346, 198 Fed. 642),. and that both the owner of the note and the indorser or guarantor may be charged for the receipt of a preferential payment made to the holder, but that only the amount by which the assets of the estate have thereby been depleted must be returned. In re George M. Hill Co., 64 C. C. A. 561, 130 Fed. 315, 318. Council for plaintiff, in substance, contend that the evidence showed that Breen & Kennedy was secondarily liable on said five notes which were paid to Graham, the holder, and that Breen & Kennedy was benefited by the preference given by Jones and had reasonable cause to believe that a preference was intended. We do not think that the evidence sufficiently proved either that Breen & Kennedy had reasonable cause to believe that a preference was intended or that Breen & Kennedy was secondarily liable on said notes. No indorsement or guaranty of Breen & Kennedy appeared on the notes, and according to the testimony of both Martin Breen and Graham there was no written agreement or oral promise made by Breen & Kennedy, or by Martin Breen individually in its behalf, to hold Graham harmless on the notes. It may be that Graham may have expected that Breen & Kennedy would make any loss thereon good, but it does not appear that Breen & Kennedy was under any legal liability to do so. Furthermore, it does not sufficiently appear that Breen & Kennedy advised, counseled or procured the payments to be made or that it had knowledge of the payments until after they had been made. Reber v. Shulman, 106 C. C. A. 110, 183 Fed. 564, 566.

And we are of the opinion that the action, as disclosed from plaintiff’s second amended statement of claim and upon which the case was tried, is one in contract and not in tort. The action was for the recovery of a certain sum of money, with interest thereon from a certain named date. In Walter Cabinet Co. v. Russell, 250 Ill. 416, 420, it is said: “The object of the rules requiring statements of claim and of set-off is to inform the parties of the nature of the respective claims, and * * * It is still the law in the Municipal Court, as in other courts, that a party is limited, in his evidence, to the claim he has made; that he cannot make one claim in his statement and recover upon proof of another without amendment. The issue is made by the statement of claim, and the evidence must be limited by that statement.” Furthermore, the case appears to have been tried upon the theory that it was an action in contract, and the plaintiff should not be heard to say in this court that the action was one in tort. “A party is bound, in the Appellate Court, as to the nature and form of the action, by the theory on which it was tried. Thus, where a cause has been tried upon the theory that it is an action in tort, and not in contract, that theory will govern the cause in the Appellate Court.” 2 Cyc. 671. This being an action in contract against two defendants, plaintiff was required to prove a cause of action against both. Griffith v. Furry, 30 Ill. 251, 255; Cassady v. Trustees of Schools, 105 Ill. 560, 565; M. W. Powell Co. v. Finn, 198 Ill. 567, 569. This, in our opinion, plaintiff did not do..

And we do not think that the trial court committed any prejudicial error in rulings on evidence, as contended by counsel.

The judgment of the Municipal Court is affirmed.

Affirmed.