Clark v. Iselin

ON appeal and cross-appeal from the Circuit Court for the Southern District of New York.

Clark, assignee in bankruptcy of Dibblee & Co., filed a bill in the District Court of the district just named against Iselin & Co., to recover certain assets which the bill charged were made over to them in fraud of the Bankrupt law; an act whose thirty-fifth section is in these words:

'If any person, being insolvent, or in contemplation of insolvency, within four months before the filing of the petition by or against him, with a view to give a preference to any creditor, or person having a claim against him, or who is under any liability for him, procures any part of his property to be attached, sequestered, or seized on execution, or makes any payment, pledge, assignment, transfer, or conveyance of any part of his property, either directly or indirectly, absolutely or conditionally, the person receiving such payment, pledge or assignment, transfer or conveyance, or to be benefited thereby, or by such attachment, having reasonable cause to believe such person is insolvent, and that such attachment, payment, pledge, assignment, or conveyance is made in fraud of the provisions of this act, the same shall be void, and the assignee many recover the property, or the value of it, from the person so receiving or so to be benefited.'

Upon the hearing a decree was made granting the relief asked for, in part, and in part refusing it; and on appeal to the Circuit Court this decree of the District Court was affirmed. Both parties now appealed to this court.

The firm of Dibblee & Co., jobbers, was formed in January, 1866, continued in business till May, 1869, and on the petition of creditors, filed May 3d, 1869, was adjudged bankrupt June 2d, 1869.

The defendants, Iselin & Co., were bankers, doing business in the city of New York, and as such had various dealings with the firm of Dibblee & Co., who from time to time required commercial facilities; advancing to them money on the pledge of bills receivable, which Dibblee & Co. had received in the course of their business.

On the 6th of August, 1868, they borrowed from the defendants $61,000, for which they gave their four notes, payable one in September, one in October, one in November, and the other in December of that year, and at the same time they transferred to the defendants, as collateral security for the loan, one hundred and forty-seven bills receivable by them, amounting in the aggregate to $72,170.42. Many of these bills were past due when they were pledged. On the day next following the loan the notes held as collateral were returned to Dibblee & Co. for convenience of collection, to be collected for account of the defendants, or to be replaced by others.

Of the four notes discounted by Iselin & Co., on the 6th of August, 1868, the one which fell due in September was paid at maturity, and the collaterals pledged for it were surrendered. The other notes were not paid when they fell due, but were renewed from time to time and extended, and the collaterals held by them were in part replaced by others.

Thus, on the 4th day of December, 1868, the day when the bankrupts' last note matured, the amount of the collaterals pledged to the defendants was $63,240.61, and they were all, or nearly all, good. It did not appear that any of them were uncollectible. For some of these others were substituted up to January 15th, 1869, and on the 5th of April, 1869, the amount of collaterals pledged for the payment of the three notes given by the bankrupts was either $63,318.89 or $65,013.15. On that day they were all withdrawn, and others, amounting to $62,027.34, were contemporaneously pledged in their stead.

This pledge was sustained by the decrees below, and the assignee appealed.

On the 8th of April, 1869, Dibblee & Co. paid to Iselin & Co. $7944.88, being the principal and interest of certain loans made without security prior to the 30th of November, 1868. The evidence showed that Dibblee & Co. were paying their debts generally, as they matured. This payment also was sustained by the decree, and the assignee appealed.

There were some other transactions which the assignee called in question, which were sustained, and from which the assignee appealed, but which need not be more particularly mentioned.

A transaction, however, which both courts set aside, and over which there was much more doubt and argument everywhere than about the others which it sustained, was of this sort.

On the 25th of February, 1869, Dibblee & Co. gave a judgment note, in the form authorized by the New York code, to secure $54,100 lent by the defendants to them. This sort of note had what is called 'a confession of judgment' on it. The maker declares that he 'confesses judgment in favor of A. B.' for such a sum, and 'authorizes judgment to be entered therefor' against him. It is the equivalent of the old 'warrant of attorney.' A portion of the sum of $54,000, mentioned in this note, had been advanced on the 21st of February, and a judgment bill then given; another portion on the 23d of February, for which a similar security was then given, and the remainder was advanced February 24th. On the 25th of that month the previous confessions of judgment were given up and destroyed, and one confession for the entire loan, $54,100, was taken as above mentioned. The advances for which this confession was taken were made in negotiable State and railroad bonds, of a larger nominal value, but they were taken by Dibblee & Co. at their cash value at the time. They were made to enable the bankrupts to borrow money, and upon depositing the securities lent as collateral they obtained $46,000 from three banks with which they did business.

The confession of judgment was held by the defendants without entry of record until April 30th, 1869, when judgment was entered upon it in the Supreme Court, as the bill averred at the request of the defendants, and an execution was issued and levied upon the debtor's stock of goods, considerably greater in value than the amount of the debt. On the next day (May 1st), at the request of the debtors, they paid to the banks with which the bonds lent had been pledged the sums for which they were held, and took up the collaterals and notes. Thus a payment was effected on the judgment of the difference between the amount of the notes and the collaterals. Then Dibblee & Co. paid $1900 in cash, and transferred bills receivable and accounts owned by them, amounting to $47,839.52, in satisfaction of the balance of the judgment, and the levy was released.

The Circuit Court decided that the mere giving of the judgment note was legitimate, but held the subsequent transaction to be fraudulent, as in conflict with the Bankrupt Act, and decreed that the assignee of the bankrupts should recover from the defendants the amount received by them from the securities transferred on the 1st of May, together with the $1900 paid to them in cash, and the value of the securities redeemed by them from the banks, above the sums which they paid for the redemption. From this part of the decree Iselin & Co. appealed, asserting that the payment, and the transfer of securities made to them by Dibblee & Co. on the 1st of May, was not a preference in fraud of the Bankrupt Act, or any preference at all.

We return now to the transactions previous to the one last mentioned (from which the defendants appealed), and state the testimony bearing upon them.

The complainant alleged that the notes discounted by the defendants for the bankrupts in August, 1868, were mere renewals, and renewals of notes previously unsecured. However, the testimony established that Iselin & Co. were fully covered with collaterals for these discounts, from the time that they originated, and that the moneys collected by Dibblee & Co., on the collaterals temporarily intrusted to them, were, until replaced, regarded as the specific property of Iselin & Co., and to be paid over by Dibblee & Co. to Iselin & Co.

The testimony further showed that Dibblee & Co. were making preparations for extending their business during the then approaching 'season.'

Two members of the firm were examined as witnesses.

One of them thus testified:

'Up to April 30th, I never heard the solvency of our house questioned, nor had I any reason to suppose that it would suspend. A week or ten days before that Mr. Dibblee had said to Mr. Bingley and myself, that we had a good prospect for the coming season. Up to the 30th day of April, 1869, I had no reason to suppose that the house was not perfectly solvent.'

Another thus:

'Though I knew little of the financial condition of Dibblee & Co., on the 30th April, 1869, I was led to believe by Mr. Dibblee's acts and from the circumstance that a few days before he directed me to re-engage certain salesmen for the approaching season, that we were on that day solvent. I did not, of my own knowledge, know of such solvency. Up to that time, however, I never heard it questioned.'

Both of these witnesses were partners in the house of Dibblee & Co., and attended to the purchases and sales made by the house, and were therefore in intercourse with the parties who sold the house goods. It seemed, therefore, that they would have been the first to hear any question as to the credit of the house being doubted.

A witness of the complainant, who, as an expert, had examined their books lately, testified that Dibblee & Co. were insolvent on the 1st day of August, 1868, to the extent of at least $75,000, and to a like amount for months provious to that date. However, subsequently to that date, the defendants purchased in the market Dibblee & Co.'s notes to the amount of over $80,000, more than $47,000 being unsecured.

On the 13th of April, 1869, a firm in which one of the Iselins was a special partner, sold goods to Dibblee & Co. upon credit for over $24,000, and the amount due them from Dibblee & Co., at the time of the adjudication in bankruptcy, and proved before the register, was $8351, one of the largest debts proved.

As already said, the court below sustained all the transactions except the last. That one it held fraudulent.

Mr. James Emott, for Clark, the assignee in bankruptcy:

1. With regard to the debt of August 6th, 1868, for $61,000. The evidence shows that Dibblee & Co. immediately took back and retained the so-called collaterals, and collected the money as if it had been their own. They doubtless used it in the same way. The whole transaction, in short, was an attempt by Iselin to escape the penalties of the Bankrupt Act, bolster up the credit of what he knew to be a failing house, and enable Dibblee & Co. to keep working along, so that he might ultimately, at all events, secure the payment of his debt.

The transactions and shiftings about the so-called 'collaterals' connected with this loan were sustained by the court below, doubtless, as being a mere exchange of collaterals. But herein lies the fallacy. Up to the time of hopeless and notorious insolvency, the securities were in the possession of Dibblee & Co. Iselin & Co. had, in truth, no collaterals; and when collaterals were really transferred, Dibblee & Co. had been insolvent for months. It is the case, therefore, of an old and unprotected debt secured in the very view of approaching failure. The case of Buchanan v. Smith covers this part of the case.

2. The payment of April 8th, 1869. This payment was made when the firm of Dibblee & Co. were certainly insolvent. Iselin & Co. must have known that fact. They were substantially the backers of Dibblee & Co. The fact that the firm was still paying other debts, got with money raised through fraudulent and secreted warrants of attorney to confess judgment, does not help them.

So far as to transactions sustained by the court below, and as to which we appeal.

3. As to the confessions of judgment. We take no appeal as to the action of the court below as to this. That court set it aside. That this action was right we think plain.

The security was an extraordinary one-not in the usual course of business, and one which, of itself, is evidence both of the debtor's precarious condition and of the creditor's knowledge of it.

The debtor was hopelessly insolvent and on the verge of bankruptcy when the confession was filed and the judgment entered. The preference by means of the judgment was not given or obtained when the paper authorizing the judgment was executed and delivered to the creditors, but when it was used and the judgment was entered. Until then there was only a continuing consent or authority; the act was done when the authority was used, and the validity of the act depends upon the conditions existing at that time.

No doctrine of relation will be recognized by the courts, which would make an act which was invalid and a fraud upon the Bankrupt law at the time when it occurred, legal and valid, because it was promised or agreed to previously, when the circumstances of the parties were different.

In the language of Judge Hall, in Graham v. Stark,

'The doctrine would defeat the purposes of the Bankrupt Act. It would be easy, in every case where it was desired, to give a fraudulent preference to a relative or other favored creditor, to make such a contract for security when called for; and such agreements would be in effect secret liens upon the property of the debtor, and enable him to effect the objects generally effected before the Bankrupt law under promises to secure relatives and indorsers against loss in any event, by assignments made for the benefit of such favorite creditors.'

If a creditor could hold a warrant of attorney or 'confession of judgment' without causing it to be entered of record, the debtor could readily obtain a false credit.

But the transaction which was set aside by the decree was even more than this. They went further than to confess a judgment and suffer a seizure; after they had committed an act of bankruptcy, they paid this debt of Iselin & Co. by turning over to the latter all their good assets, their bills receivable and accounts. It is not important that the Iselins in fact reaped no advantage from this payment or transfer of securities. If they had not expected to do so, and if it had not been intended that they should, the transfer would not have been made. The assignee in bankruptcy had a right to the property of the bankrupts in an unchanged condition. He might have contested the levy, stayed the sale of the goods, and had the goods or their proceeds in court, to abide the event. The bankrupts and their favored creditors had no right to turn him over to an action against parties who might or might not be responsible, to recover the value of property to which they had no right.

Messrs. H. W. Clark and S. P. Nash, contra, for Iselin & Co.

Mr. Justice STRONG delivered the opinion of the court.