« AnteriorContinuar »
erence to this bond and mortgage (page 1 of the testimony) as follows: 'Q. Here is a mortgage that you gave Harby & Company upon your interest as an heir at law and distributee of J. E. Tindal, $1,900, May 1st, 1906. Has that mortgage been proven, Mr. Referee? A. No, sir. Q. Is that for a present consideration? A. It was not. Q. I see the amount is $2,431.40. When was that debt contracted? A. $1,900 was for fertilizers obtained in May, 1906, $500 was some funds, and interest added for the funds. Q. You got the money? Did you get that money, $2,431.40, at the time you executed the mortgage? A. No, sir; I got $500, less the interest. Q. When did you get the balance? A. The balance was for fertilizers, nineteen hundred and some odd dollars. Q. When were those fertilizers furnished you? A. In May. Q. The date of the mortgage is May? A. No, sir; November or December, I have forgotten exactly.' On page 49 of the testimony the bankrupt stated, in reply to the examination of the trustee, as follows: "Q. When did you see this bankruptcy coming on you? A. About the 13th of February. Q. The 13th day of February; why that is the day you filed your petition? A. That is the time I decided to go into bankruptcy. Q. Well, then, when did you find out you could not pay your debts? A. About the same time. Q. In the fall of 1906, were you not pressed for money? Didn't you see then that you could not pay your debts? A. I didn't know, but thought I could make arrangements. Q. That was in the fall? A. In January or December, 1906, I tried to make arrangements. The only other testimony with reference to the mortgage in question was given by H. J. Harby and Abe Levi, and a copy of this testimony is hereto attached. The testimony of H. J. Harby was substantially as follows: That the bankrupt had been doing business with him for two or three years, and had always paid promptly. That in the spring of 1906 Harby & Co. sold the bankrupt on open account fertilizers amounting to $1,900. That Mr. Tindal had always paid his accounts promptly, and in fact had anticipated payments. That crops were exceedingly short, and that at the maturity of this debt he went to the home of the bankrupt, and asked him for payment. The bankrupt told him he could not pay, and Mr. Harby then asked him for a mortgage of his individual property, and the bankrupt told him that it was already mortgaged, but that he owned an interest in the estate of his father, James E. Tindal, and would give him a mortgage on that interest. Mr. Harby agreed to take the same, and with the bankrupt went to Manning for the purpose of having the papers prepared. Mr. Harby testified that he had no notice of any kind that Mr. Tindal was insolvent, and on the contrary made especial inquiry regarding the loan, and found that it would be a first class loan for him to take. He states that Mr. Tindal told him that 'thať (referring to the Harby debt) and one other matter was about the only matter he had to get straightened up. That when they arrived in Manning, the bankrupt asked him for an additional loan of $500, and he told him, as the security was good, he was willing to let him have it. Mr. Harby stated that Mr. Tindal told him that he had had a disastrous year; what he had been making and what he had made. That he usually made 200 bales of cotton, and had gotten something like 25 or 30 bales. Mr. Harby was asked why he went on the very day the account became due to see Mr. Tindal, and he said: 'It was a pretty hard year, and I knew very well that Mr. Tindal was like a great many other people in Clarendon county, unable to meet their obligations. I figured in my mind, I will go down and take a paper, and will transfer that paper to the estate of Horace Harby, and get my money. Q. You thought he was hard up? A. Yes; everybody was who farmed. Q. Did you know what other concerns Mr. Tindal was dealing with last season? A. I only know by hearsay, from what I heard from Mr. Tindal at that time. I know since, because I have seen. From what Tindal told me, the only debt of any consequence pushing him was the debt due to the Sumter Banking & Mercantile Company. Q. Did he tell you how much that was? A. He said they claimed that he owed them $2,300 or $2,400, but that it was a mistake; he said that he owed them about $1,800.' Mr. Harby further stated that Mr. Tindal mentioned no creditors to him but the Sumter Banking & Mercantile Company, other than the secured creditors for the purchase of lands bought in his own name outside the estate. Mr. Harby further stated as follows: 'Q. You thought that you were about the only creditor outside of the Sumter Banking & Mercantile Company? A. Except the secured creditors for the purchase of lands that he bought in his own name, outside of the estate, I thought that the banking company and I were the only creditors, and to go further, his business relations were so obscured as to other parties that it has not been thirty days since the attorney for the estate of James E. Tindal requested to know where that mortgage was, as he wanted the estate of Tindal to take it up, not knowing of these other debts. Q. When was that? A. About thirty days ago-possibly forty-five. Q. Can't you recollect about the time? A. I say about thirty or forty-five days ago. I said “No” that mortgage is in the estate of Horace Harby, and we made it for an investment, and we want it.' It was stated in open court by Mr. Cuttino, one of the attorneys engaged in the matter, that he was the attorney representing the estate of Tindal, who had made the offer to Mr. Harby to purchase the bond and mortgage for the estate, and as late as that time the estate of Tindal had no idea that A. J. Tindal was insolvent. Mr. Harby stated that he never knew that Tindal was in financial trouble until he saw his mules advertised, or his attention was called to the mules being sold in front of the courthouse at Sumpter by O'Donnell & Co. The time was shown to be in January, 1907. He stated that the bond and mortgage were drawn at short time because Mr. Tindal expected to be able to pay when due, and he had partially agreed to extend the time. Mr. Levi testified merely in substance that before Mr. Harby took the mortgage he asked his opinion as to the value of the security. It is evident that the only fact known to Mr. Harby was that crops were generally short in that county, and that Mr. Tindal likewise had short crops; that Mr. Tindal's individual property was mortgaged; that is to say, his real estate and some of his live stock. This was in November, when the crops were being gathered, and before the business of the season was wound up and the result of the year's business could be ascertained. While Mr. Tindal must have known of bis financial condition, he could not have known whether he would be able to obtain extensions of time and go on with his business or not.
"The burden of proof is on the trustee to show that Mr. Harby had reasonable cause to believe that a preference was intended. By section 1 (15) of the bankruptcy act, insolvency is defined: “A person shall be deemed insolvent, within the provisions of this act, when, if the aggregate of his property, exclusive of any property which he may have conveyed, transferred, sold, or removed, or permitted to be sold or removed, with intent to hinder and delay his creditors, shall not at a fair valuation be sufficient in amount to pay his debts. And in Re Eggert, 4 Am. Bankr. Rep. 458, 102 Fed. 738, the court say: 'In this respect the act is widely different from the act of 1867. There the term "insolvency" was construed to mean an inability to meet one's obligations as they mature in the ordinary course of business. The term "insolvency" in the present act is equivalent to the term "bankruptcy" in the former act. While, therefore, rulings under the former act are inapplicable in a certain sense, because of this difference in the meaning of the term insolvency, they do apply so far as they determine the principles of law by which it is to be ascertained whether a creditor receiving a preference had reasonable cause to believe that the debtor had not at the time property sufficient, at a fair valuation, to pay all of his debts.' And in Re Eggert, 3 Am. Bankr. Rep. 541, 98 Fed. 813, it was held: "To constitute a voidable preference, as defined in section 60a and section 60b, the creditor must have reasonable cause to believe the debtor to be insolvent in fact, as the foundation for a reasonable cause to believe that an unlawful preference is intended. In Brandenberg on Bankruptcy (page 341) the author says: 'A knowledge of facts and circumstances, or the existence of a condition of facts with a knowledge of which he is chargeable, which would put a prudent man upon inquiry, is a reasonable cause to believe a debtor insolvent; and, if a creditor had reasonable cause when taking a preference to believe the debtor insolvent, it makes no difference of what he thought or knew of the debtor's intention in giving the preference. The intention of the creditor is not to be considered. In Peck v. Connell, 8 Am. Bankr. Rep. 504, the court say: "The right of a trustee to avoid a preference and recover the property is made to depend, not only upon the act and state of mind of the giving debtor, but the state of mind of the receiving creditor must also be considered. It is not enough that an advantage in fact be given, but to make it voidable 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. The debtor must have intended to prefer, and the creditor must have had reasonable cause to believe that such intention existed. * * * The bankruptcy act does not take from the creditor all incentive to vigilance; he may still collect his claim from an insolvent debtor by legal process. Such process does not fall within the band of the bankruptcy act, unless the creditor shall have had reasonable cause to believe that it was intended thereby to give a preference. The intention of the creditor to obtain a preference is not condemned. *
Knowledge or reasonable cause to believe that a preference is intended involves knowledge of a reasonable cause to believe that insclvency exists as a matter of fact.' Savings Bank v. Jewelry Co., 12 Am. Bankr. Rep. 781, 99 N. W. 121; Barbour v. Priest, 103 U. S. 293, 26 L. Ed. 478. In the case of Grant v. Bank, 97 U. S. 80, 24 L. Ed. 971, the court say: 'It is not enough that a creditor has some cause to suspect the insolvency of his debtor, but he must have such a knowledge of facts as to induce a reasonable belief of his debtor's insolvency in order to invalidate a secured payment for his debt. To make mere suspicion a ground of nullity in such a case would render the business transactions of the community altogether too insecure. It was never the intention of the framers of the act to establish any such rule. 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 unwilling 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. Obtaining additional security or receiving payment of a debt under such circumstances is not prohibited by the law. Receiving payment is put in the same category in the section referred to as receiving security. Hundreds of men constantly continue to make payments up to the very eve of their failure, which it would be very unjust and disastrous to set aside, and yet this could be done in a large proportion of cases if mere grounds of suspicion of their insolvency were sufficient for the purpose. The debtor is often buoyed up by the hope of being able to get through with his difficulties long after his case is in fact desperate, and his creditors, if they know anything of his embarrassment, either participate in the same feeling, or at least are willing to think, that there is a possibility of his succeeding. To offer to hold and set aside all his transactions with his creditors, made under such circumstances, because there may exist some grounds of suspicion of his inability to carry himself through, would make the bankruptcy law an engine of oppression and injustice. It would in fact have the effect of producing bankruptcy in many cases where it might otherwise be avoided. This doctrine was reaffirmed in Stuckey v. Bank, 108 U. S. 74, 2 Sup. Ct. 219, 27 L. Ed. 610. In Hackney v. Raymond Bros. & Clarke, 10 Am. Bankr. Rep. 216, 94 N. W. 823, it was held : "That notice that a debtor has not paid a claim at maturity is not necessarily a conclusive notice of insolvency under the present law.' In the case of Eggert, 4 Am. Bankr. Rer. 450, 102 Fed. 742, the court say: "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 cannot say, as a conclusion of law, that knowledge of that fact, standing alone, was sufficient to put the creditor on in
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 all times able to promptly meet their obligations as they mature. To hold that a creditor receiving payment of or security for a past-due debt is by the mere fact of knowledge that the debt is past maturity put on inquiry of his debtor's inability to pay all of his debts, and that under such circumstances is receiving payment or security at his peril, would be to put at hazard many business transactions and make the act oppressive.' In Dutcher v. Wright, 94 U. S. 553, 24 L. Ed. 130, the court say: 'If it appears that the debtor giving the preference was actually insolvent, and that the means of knowledge were at hand, and that such facts and circumstances were known to the creditor seeking the preference as clearly to have put a prudent man upon inquiry, it must be held that he had reasonable cause to believe that the debtor was insolvent, if it appears that he might have ascertained that fact by reasonable inquiry
"There is no showing here that Tindal himself was conscious of his insolvency on November 1, 1906; there is no statement of his assets and liabilities; there is no showing that Mr. Harby could have known who Mr. Tindal's creditors were other than those named to him by Mr. Tindal, and those of whom he is to be held to have had constructive notice by reason of the public records; there is no proof as to the extent of Mr. Tindal's means; there is no showing that there was even a suspicion of his insolvency in the minds of the public at that time. The public records disclose the fact that Mr. Tindal's interest in his father's estate, which was supposed to be of considerable value, was unincumbered and that his crops were unincumbered. Mr. Harby was a diligent creditor. In the case of Sirrine v. Stover, Marshal & Co., 64 s. C. 457, 42 S. E. 432, the court say: 'The rule established by the decisions of the United States Supreme Court as to the meaning of the words reasonable cause to believe, etc., under the act of 1867, is applicable in determining the meaning of the words reasonable cause to believe it was intended as a preference under the act of 1898; since a reasonable cause to believe a preference was intended by the debtor involves a reasonable cause to believe the debtor insolvent, as a preference depends on insolvency.' The courts say further: 'In determining whether the taking of a security by a creditor constitutes an illegal preference under the bankruptcy act of 1898 (section 60b), the creditor is not to be charged with knowledge of his debtor's financial condition from mere nonpayment of his debts, or from circumstances which give rise to mere suspicions in his mind of possible insolvency. On the other hand, it is not essential that the creditor should have actual knowledge of or belief in his debtor's insolvency, but it is sufficient if he has reasonable cause to believe him insolvent. 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.'
"It was conceded by the counsel in the case that to the extent of the $500 advanced by Mr. Harby at the time of the taking of the mortgage referred to there was no question, and that to that extent the estate of Harby must be considered a secured creditor. Under the facts and circumstances incident to the execution of the bond and mortgage referred to, I must conclude that the trustee has failed to show that Mr. Harby had reasonable cause to believe that the bankrupt intended to give a preference, and the claim of the estate of Harby must be allowed as a secured claim.
"In the course of these proceedings, on April 10, 1907, an order was made that the property of the bankrupt be sold by the trustee, and in and by said order it was provided that the property sold and disposed of be held to be valued as follows, to wit: "The interest of the bankrupt in the real estate of the estate of J. E. Tindal, $4,000, the personal property of the bankrupt, $1,000, and the interest of the bankrupt in the personal estate of James E. Tindal of no value, by reason of the claims and off-sets held by and due to the estate of J. E. Tindal.' And in and by said order it was further provided : "That the funds derived from the sale of the property of the bankrupt be kept in separate accounts by the trustee; that is to say, that separate accounts be kept of the funds derived from the sale of the real estate and of the funds derived from the sale of the personal property. And the said order further provided : "That the funds derived from the sale of the said property shall be held by the trustee to answer in the place and stead of the specific property sold to such creditor as may hold claims or incumbrances upon the said property, and which may hereafter be allowed as secured claims; and that the rights of all creditors claiming securities as against specific property be preserved as against the funds in the hands of the trustee.'
“It was conceded that the mortgage held by the estate of Harby, and above referred to, was a first lien in order of priority upon the interest and share of the bankrupt in the estate of James E. Tindal; hence it is ordered that the claim of the estate of Horace Harby be, and the same is hereby, allowed as a secured claim for the sum of $2,442.43, with interest thereon from the 1st day of November, 1906, at the rate of 8 per cent. per annum, payable annually, and the further sum of 10 per cent. upon the amount so due to cover attorneys' commissions, the same being provided for and secured by the terms of the said bond and mortgage, and that the amount so allowed shall be first paid out of the fund of $4,000 derived from the sale of the interest of the bankrupt in the estate of James E. Tindal.
“On the 11th day of March, 1907, G. Manly Norris offered proof of indebtedness due him by the bankrupt, and demanded that the said account be filed and allowed as a secured claim; the security being a mortgage executed by the bankrupt to the claimant on the 5th day of February, 1907, covering the interest of the bankrupt in and to the estate of J. E. Tindal, both real and personal property. This mortgage was only recorded as a mortgage of real estate. At the same time Mrs. H. H. Norris offered for allowance as a secured claim proof of her account against the bankrupt; the security consisting of a mortgage executed by the bankrupt to the claimant on the 2d day of January, 1907, covering the interest and share of the bankrupt in and to the real estate of the estate of J. E. Tindal.
“In view of the fact that the interests of the bankrupt in the personal estate of J. E. Tindal has been held to be of no value, it is needless to consider the question involved as to the failure to record the mortgage of G. M. Norris as a mortgage of personal property.
"The trustee objected to the allowance of these claims as secured claims, on the ground that the same constituted preferences, under section 60a, and section 60b of the bankruptcy act, and that they were voidable by him for that reason, and on the further ground that the same were void under section 67e of the said act. Inasmuch as the facts are somewhat different, it will be necessary to consider these mortgages separately: In the case of the mortgage of G. Manly Norris, the testimony of the bankrupt is that the mortgage was given to secure an antecedent debt, contracted in May, 1906, and maturing October 1, 1906; that in the latter part of December, 1906, or 1st of January, 1907, the bankrupt had prepared and signed a mortgage covering his interest in the estate of J. E. Tindal in favor of the claimant for the sum of $7,000, and that he went to the claimant, and asked him to make a further advance of $6,000, and take the mortgage as security for such advance and for the sum then due him. At that time the creditor had made no effort to collect his debt, and had required no security. Mr. Norris testified that he refused to make the further advance for the reason that he suspected that the amount wanted would not pay the indebtedness then due by the bankrupt. In answer to the question, 'Q. Were you willing to make him the loan for $7,000? he says, 'I was willing to make him the loan until I found out exactly how the matter stood, and then I declined to make the loan. He was asked why he did not make further advances under the mortgage, and he stated that he suspected that it would not pay all of the accounts, and he therefore declined to go further with it. He was then asked: 'Upon making that determination, what did you do? A. Then I asked him to give me a mortgage for the $1,000 that he owed me in lieu of this $7,000 that he had already given. Q. At the time of taking that mortgage for $1,000, did you know of his financial condition better than when you took the mortgage for the $7,000? A. No; I didn't know it. I suspected that it would not pay his accounts.' Mr. Norris was the father-in-law of the bankrupt. The mortgage for $7,000 was not offered in evidence. When this mortgage was presented to him, Mr. Norris evidently undertook to make some investigation, and found such a state of facts as caused him to refuse to make further advances, and to demand security for the indebtedness then due him.
“The principle is well established that courts will scrutinize transactions between relatives with exceeding particularity. I held above that Mr. Tindal was insolvent on November 1, 1906. No showing was made that there was any improvement in his condition subsequent to that time, and I am forced to hold that he was likewise insolvent at the time of the execution of the mortgage to G. M. Norris, and that the enforcement of this security would enable Norris to obtain a greater per centage on his debt than other creditors of the same class. This was within four months of the adjudication in bankruptcy.
"The only question to be determined is, did G. M. Norris have reasonable