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United States for the Southern Division of the Eastern District of Tennessee in a suit in equity of the North American Trust Company against the defendant in this cause brought to foreclose said mortgage.
In response to the charge of the commission of the act of bankruptcy set forth in the amended petition, the answer thereto, for the first time, denies the insolvency of the defendant, but avers that the property owned by it, taken at a fair and reasonable valuation, is in excess of its liabilities, and that it is not insolvent, within the meaning of the law. It admits the specific payments to the C. D. Kenny Company and to Muxen & Co. in the amounts and at the times alleged in the amended petition, but sets up, by way of defense to the charge that said payments constitute an act of bankruptcy under clause 2 of section 3, Act July 1, 1898, c. 541, 30 Stat. 546 [U. S. Comp. St. 1901, p. 3422]. the insistence that all of said payments were made in good faith, not only in ignorance of the fact that defendant was insolvent, but in the bona fide belief that it was solvent, and would be able to continue its business as it had been running before said payments were made. It denies that there was any intent whatever to create a preference in favor of said creditors, but, on the contrary, avers that the payments were made in the regular course of business of the defendant company. It further sets up by way of defense other payments made to the Wilcox-Carter Furniture Company in the sum of $509.49, and to Montague & Co. in the sum of $572 (said parties being two of the three petitioning creditors in this case), likewise alleged to have been made within four months prior to the filing of the petition, and in the regular course of business, and insists that said amended petition ought not to be maintained on account of the alleged preferences to the C. D. Kenny Company and Muxen & Co., because of the fact that said petitioners, Wilcox-Carter Furniture Company and Montague & Co., had likewise received payments, just as had the Kenny Company and Muxen & Co., under similar conditions, and within said four-months period; and these facts are set up in estoppel against the petitioners' maintaining the amended petition.
The above is, in substance, the state of the record with respect to the condition of the pleadings. The only proof introduced on the part of the complainants consists of the depositions of James Sloan, D. P. Montague, E. Gill, and F. V. Brown, and of the original record in the foreclosure suit of the North American Trust Company, heretofore alluded to, which was introduced by consent. The defendant company introduces no proof, except two books purporting to be its ledger and journal, and a memorandum statement filed by its attorney, showing the indebtedness of the company (unsecured), so far as said attorney was advised thereof. This statement, however, is limited to unsecured debts, amounting to a total of something over $27,000, but makes no mention of the mortgage indebtedness. In addition to the production of said ledger and journal, and of the filing of said statement, the only remaining evidence produced by the defendant consists of the depositions of Chas. L. Carter, of the Wilcox-Carter Furniture Company, of L. S. Greenwood, of the C. D. Kenny Company, and of A. Muxen, of A. Muxen & Co., who were examined by the defendant relative to the payments made by it to them, and for the purpose of establishing the proposition insisted upon by the defendant in its answer, that the same were made in the usual and ordinary course of business. This is, in substance, the entire record of the cause.
At the outset it is necessary for us to consider whether or not the defendant company was insolvent at the time of the commission of the specific acts of bankruptcy charged in both the original and amended petition, the fact of insolvency being a necessary prerequisite to the commission of an act of bankruptcy. By section 1, subd. 15, Act July 1, 1898, c. 541, 30 Stat. 544 [U. S. Comp. St. 1901, p. 3419], a person shall be deemed insolvent, within the purview of the law, when the aggregate value of his property, exclusive of any property which he may have conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, with intent to hinder, defraud, or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay his
debts. By section 3, subd. "d," 30 Stat. 547 [U. S. Comp. St. 1901, p. 3422], it is provided "that whenever a person against whom a petition has been filed as herein provided under the second and third subdivisions of this section [which second subdivision referred to defines the act of bankruptcy charged in the petition] takes issue with and denies the allegation of his insolvency, it shall be his duty to appear in court on the hearing with his books, papers, and accounts, and submit to an examination and give testimony as to all matters tending to establish solvency or insolvency, and in case of his failing to so attend and submit to examination the burden of proving his solvency shall rest on him." In this case the defendant company did not attend the hearing before the master, through its officers or agents, nor submit to an examination, nor give testimony upon the issue of solvency or insolvency; nor did it produce any papers, books, or accounts, save the ledger or journal and the memorandum statement of unsecured indebtedness, both of which the master finds are incomplete and unsatisfactory-the books, because it appears from the entries therein that references were made to other books of original entries, which were not produced, and because it further appears that no reference is had in said ledger or journal to the indebtedness of $250,000 due to the North American Trust Company, and said memorandum of account is also insufficient because it makes no reference to the secured indebtedness.
It is insisted by counsel for the complainants that the necessary effect of the failure of the defendant to attend as required by this section, and to produce his books, papers, and accounts, and submit to an examination, is not only to throw the burden of proving his solvency upon him, as the law provides, but, having so failed, and in the absence of evidence to the contrary, the court is justified, per se, in assuming that the defendant is insolvent; and there is, in the opinion of the master, some ground for this contention. A presumption of insolvency is raised against a debtor who refuses to produce his books and papers and submit to an examination. In re Rome Planing Mill (D. C.) 96 Fed. 812. A simple denial of the fact of insolvency in the answer, unaccompanied by any affidavits, schedules, or other evidence, does not raise such an issue of solvency as is contemplated by the act, nor sustain the burden of proof. Bray v. Cobb (D. C.) 91 Fed. 102. It has also been held that, when the burden of proof is cast upon the defendant, that means that, in the absence of any proof, the issue shall be found against him. The true test to determine upon whom the burden rests is, against whom would the verdict be given if no evidence was offered on either side? Anderson's Law Dictionary, p. 135; Best's Evidence, p. 268; Millis v. Barber, 1 Mees. 425.
As above stated, what little proof was introduced by the defendant in the effort to sustain the burden of proving its solvency was only partial, and unsatisfactory because unreliable. On the other hand, the complainants, notwithstanding that, in this condition of the record, they were not called upon to go further, nevertheless established by the witness Montague, who is shown to have been engaged in a similar line of business to the defendant, and acquainted with the values of mining properties, that its total indebtedness, including its outstanding bonds, was something over $400,000, and that he ascer tained this fact from admissions made to him by officers of the defendant company. He also shows that the aggregate value of the assets of the defendant company at the date of the filing of the petition was $150,000. The master therefore reports that on this issue it sufficiently appears that the defendant company was insolvent at the time of the commission of the respective acts of bankruptcy charged.
Appointment of Receiver Because of Insolvency.
Was a receiver appointed for the defendant company because of insolvency, within the meaning of the phrase as used in subdivision 4 of section 3 of the amended act of February 5, 1903, c. 487, 32 Stat. 797 [U. S. Comp. St. Supp. 1903, p. 410], heretofore set out? It is a part of the history leading up to the enactment of this amendment that prior thereto, and under the operation of the original law, receivers were appointed in many cases in state courts for insolvents, that method being adopted in certain states in which general assignments are unknown; and, under the rulings of the federal courts of bankruptcy-notably, among others, in the case of the Harper Bros. Publishing Co.
-it was held that such appointments were not tantamount to the making of a general assignment under this clause, and could not be so construed. Hence the appointment of a receiver for an insolvent was, per se, held not to be an act of bankruptcy. To cure this defect in the act, an amendment was ingrafted upon said subdivision 4 of section 3 by the act of February 5, 1903. As the amended bill passed the house, subdivision 4 of said section read as follows: "Made a general assignment for the benefit of his creditors or being insolvent applied for or had been put in charge of a receiver or trustee under the laws of a state or territory or of the United States." If the law as it passed the Senate had been left in this condition, it would have been necessary only to allege that a receiver had either been applied for or had been placed in charge of an alleged bankrupt's property while such bankrupt was in an insolvent condition. That is to say, only two issues could possibly arise-insolvency and receivership resulting therefrom. When the amended bill reached the Senate, the language of the House measure was changed as follows: After the word "for" the clause "or had been put in charge of a receiver or trustee" was stricken out, and the words "a receiver or trustee for his property or because of insolvency a receiver or trustee has been put in charge of his property" were inserted, and before the word "territory" the word "or" was likewise stricken out, and the words "of a" were inserted in its place, the effect of which was to make said amendment read as it now is in the law as finally passed. See page 1101 of the Congressional Record, 57th Cong.. 2d Sess. It does not appear in the Senate debates why this change was made, or at whose instigation it was done. Presumably, it was made in the Senate judiciary committee. But that committee made no written report, and, there being no general debate on the measure, no benefit can be derived upon the question of the proper elucidation of the meaning of this clause from the proceedings prior to its enactment. The defendant insists in this case that a receiver was not appointed for it because of insolvency, but, on the other hand, that such appointment was made because of the violation of certain mortgage covenants contained in a certain mortgage given by it some time before this bankruptcy to the North American Trust Company to secure an issue of $250,000 of first mortgage bonds. On the other hand, complainants insist that while this was the apparent, or, rather, ostensible, reason advanced for the receiver's appointment, the underlying cause was insolvency, in fact, which insolvency set in motion the other grounds set up. It will be seen from the bill under which said receiver was appointed, and the purpose of which is to foreclose said mortgage, that the insolvency of the defendant does not appear from any specific allegations therein made, but the alleged grounds for the appointment, as stated by the bill, are the defendant's default in the payment of interest on said bonds for a year-likewise, its default in the creation of a sinking fund for the ultimate redemption of said bonds-and that defendant has, by reason of said defaults, allowed said mortgage to mature and become payable many years before the bonds were due on their face. Does this showing of said bill justify the logical deduction that this receiver was appointed "because of insolvency"?
It is insisted by the complainants that the consequent change of the language of this clause in the Senate from that contained in the House bill has in no sense altered its meaning, and that, in legal effect, the expression "because of insolvency" is equivalent to the former phrase, "being insolvent," as defined in the House measure. I cannot agree with this contention. The expression "being insolvent," as I consider it, refers alone to the status or condition, in point of fact, while the phrase "because of insolvency" is meant to refer to the result which flows from that status or condition, and not to the status or condition itself. The intent of the change was to limit the act of bankruptcy, where the appointment of the receiver was made at the instance of parties other than the bankrupt, to cases alone in which such appointment was predicated upon insolvency, and to exclude thereby appointments of receivers for solvent corporations as, for example, in cases where stockholders or directors could not agree as to the conduct of the business, and it became necessary to wind it up, regardless of the insolvency, or to protect minority stockholders in certain cases against undue encroachments upon their rights by the majority, or to wind up solvent partnerships, whose partners could not agree, and various
131 FEDERAL REPORTER.
other cases which might be named, which were evidently intended to be excluded from the operation of the bankrupt law. This character of cases would, of course, be excluded, just as well under the House measure, since they are cases of solvent, and not insolvent, corporations or partnerships; but it was the evident intent by the change of language in the Senate to make the act of bankruptcy dependent upon the state of facts disclosed upon the record in the case before the court making the appointment. To my mind, therefore, in determining the question whether or not the receiver was appointed because of insolvency, it was the intent to preclude the bankruptcy court, in determining the question whether or not an act of bankruptcy had been committed under this amended clause, from looking beyond what appeared upon the face of the record in the case before the court making the appointment, and to prohibit any indulgence in inferences or intendments where the reasons actuating the appointment are not plainly self-evident. This might lead, if tolerated, to results too speculative and imaginary in the extreme.
It is insisted by counsel for the complainants that such an interpretation of this clause clearly results in many cases in a partial failure of the law to accomplish its evident purpose, since ingenious counsel, as may have been the case here, can so frame their bill as to avoid the allegation of insolvency, and obtain the appointment of a receiver on other grounds. It is a sufficient reply to this contention, in my judgment, to state that it is the duty of the courts to construe the law as they find it, and not to attempt by interpretation to supply the defects which it is the manifest duty of the legislative branch of the government, not of the judicial, to remedy.
Furthermore, it may be said that there are, perhaps, but few instances in which receivers could be appointed for corporations or individuals insolvent in point of fact, without such insolvency being relied upon as a ground to secure the same; and these instances are so rare as to be worthy of but little notice. I think the plain purpose and effect of the change in said language from the expression "being insolvent" to the phrase "because of insolvency" was to save the necessity in the bankruptcy case of the petitioning creditors being required to litigate again over the question of solvency or insolvency of the alleged bankrupt, and that it was the intent to preclude the necessity of doing this by the necessary admission or adjudication of such insolvency to be derived from the record in the case in which the appointment was made.
It is insisted by counsel for complainants that the word "insolvency," as used in this section, cannot be limited to the technical definition of insolvency as set out in section 1, subsec. 15, Act July 1, 1898, c. 541, 30 Stat. 544 [U. S. Comp. St. 1901, p. 3419], heretofore quoted, but that such latter definition ap plies only to the adjudication of bankruptcy when insolvency is a prerequisite therefor, and that the federal courts of equity and the state courts act upon quite a different definition, in that, when they appoint a receiver because of insolvency, it is insolvency according to their own definition. I think it undoubtedly true that, inasmuch as receivers are appointed by both state and federal equity courts in cases other than bankruptcy for insolvent concerns. the term "insolvency," as regarded by them, cannot, perhaps, be limited to the definition given by the act of 1898; but, when we come to consider the making of such appointment as a specific act of bankruptcy, it is certainly essential the case should be brought within the scope of the definition given by the act; and unless, therefore, the property of an alleged bankrupt is less, taken at a fair valuation, than the aggregate of his indebtedness, I do not think he is insolvent in such sense as to make him guilty of an act of bankruptcy by the appointment of a receiver for his estate, although he might be insolvent in the sense that he could not pay his debts in the ordinary course of business. This conclusion is emphasized by the fact that the definition insisted upon by complainants is exactly that used in the former bankruptcy act of March 2, 1867, c. 176, 14 Stat. 517, but which has been changed by the present law. In other words, the court is limited in construing the meaning of the term "insolvency" to the specific definition given by the act, and certainly has no right to adopt any other meaning unless the act itself is silent upon the subject. An expressed definition excludes all inferences. I therefore find that this act of bankruptcy is not made out.
Payments with Intent to Prefer.
Section 3, subd. 2, Act July 1, 1898, c. 541, 30 Stat. 546 [U. S. Comp. St. 1901, p. 3422], provides that it shall be an act of bankruptcy “if a person has transferred while insolvent any portion of his property to one or more of his creditors with intent to prefer said creditors over his other creditors." In order to establish an act of bankruptcy under this section, it is necessary to prove, first, a transfer of property to a creditor; second, the debtor's intent to prefer such creditor; third, the insolvency of the debtor at the date of the transfer; the burden of proof being on the petitioners, except as provided in paragraph “d," where the alleged bankrupt fails to appear for examination and to submit his books and papers. In re Rome Planing Mill (D. C.) 96 Fed. 812. Since it has been held that a payment of money is a "transfer of property," and since the master has already found that the defendant company was insolvent at the date of such payments, the only remaining facts necessary to establish this act of bankruptcy are the intent of the debtor to prefer, and the necessary effect of the payment to give a particular creditor or creditors receiving the same a greater percentage of their debts than other creditors of the same class; the latter essential being for some reason omitted by the judge deciding the above case, but it being expressly necessary to show this in order to create a preference as shown by section 60a, Bankr. Act July 1, 1898, c. 541, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3445].
We will deal first with the question of intent. It is insisted by counsel for the complainants that the law upon this is that when the debtor is insolvent in point of fact, and the necessary effect of the particular payment or payments is to create a preference, then the debtor's intent so to do will be presumed; such intent being the necessary and logical consequence of his act. On the other hand, it is contended by counsel for the defendant that such intent cannot be presumed from transactions like the ones we are now dealing with, where the payments were made by the defendant, although insolvent, but in the usual and ordinary course of business. In order to arrive at a correct solution of the meaning of these respective contentions, it is well for us to note the status of the law upon this subject. Under the bankruptcy act of March 2, 1867, c. 176, 14 Stat. 517, there are many cases to the effect that a debtor, knowing his insolvency, who has paid one creditor to the exclusion of others, cannot be heard to say that he did not intend to give such creditor a preference. Martin v. Toof, Fed. Cas. No. 9,167; In re Oregon Bulletin Printing & Pub. Co., Fed. Cas. No. 10,559; In re Drummond, Fed. Cas. No. 4,093; In re Dibblee, Fed. Cas. No. 3.884.
Under the present act it has likewise been held that the intent to prefer will be presumed in the following cases:
(1) From a transfer of a large portion of property by an insolvent to a single creditor. In re Rome Planing Mill (D. C.) 96 Fed. 812.
(2) Where a transfer has been made by an insolvent merchant of his entire stock in trade to a single creditor. Goldman v. Smith (D. C.) 93 Fed. 183.
(3) From a transfer by an insolvent debtor to one of his creditors, in payment of his debt. of sufficient personal property to satisfy the debt in full; the debtor receiving surplus difference in cash. In this case the debt was $2,000, the value of the property conveyed about $2,500, and the balance of $480 was paid to the debtor in cash. Johnson v. Wald, 93 Fed. 640, 35 C. C. A. 522.
(4) In the payment of rent by an insolvent debtor on a leasehold interest in a bakery, to continue the business, with intent to defraud creditors by hoarding and secreting the proceeds of the business so continued. In re Lange (D. C.) 97 Fed. 197.
(5) By a sale by an insolvent debtor of all his property to one not a creditor, and the application of the proceeds to the full payment of a part of his creditors, leaving others unpaid. Boyd v. Lemon & Gale Co., 114 Fed. 647, 52 C. C. A. 343.
(6) By the execution by an insolvent of a deed of trust to a single creditor to secure a pre-existing debt. In this case the mortgage secured a debt of $2,885, out of $14,000 of indebtedness. In re Wright Lumber Co. (D. C.) 114 Fed. 1011.