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U.S. Supreme Court

Mechanics' & Metals Nat'l Bank v. Ernst, 231 U.S. 60 (1913)

Mechanics' & Metals National Bank v. Ernst

No. 44

Argued October 20, 1913

Decided November 3, 1913

231 U.S. 60




National City Bank v. Hotchkiss, ante, p. 231 U. S. 50, followed to effect that the delivery by the bankrupt of securities to a bank to secure a clearance loan constituted an illegal preference.

This Court approves the findings of the court below that the bank knew of the impending bankruptcy when it demanded and accepted security for an existing loan.

An unusual proceeding in the banking business, such as an officer's leaving the bank and going to the customer's office and demanding additional security for a loan made earlier the same day, indicates knowledge of the impending bankruptcy of such customer.

A general promise to give security on demand puts the creditor in no better position than an agreement to pay money, and does not justify a delivery of securities after knowledge of impending bankruptcy. It is an illegal preference.

A deposit made after the bank's officers have forbidden payment of checks against the bankrupt's deposit account is a payment and a preference, and a set-off cannot be allowed.

200 F.2d 5 affirmed.

The facts, which involve the determination of the question of whether the delivery of securities by a broker immediately preceding his bankruptcy to a bank to secure its loan was an illegal preference, are stated in the opinion. chanroblesvirtualawlibrary

Page 231 U. S. 65

MR. JUSTICE HOLMES delivered the opinion of the Court.

This is an appeal from a decree of the circuit court of appeals, reached upon the same opinion that disposed of National City Bank v. Hotchkiss, just decided, ante, p. 231 U. S. 50. (The judgment of the district court will be found chanroblesvirtualawlibrary

Page 231 U. S. 66

in 200 F.2d 5.) This case arose at the same time, and differs but little from that in its facts, as to which, as in the other case, the master, the district court, and the circuit court of appeals all agree.

The advance in this case was made at about ten on the following note, to the firm signing it, "Please loan us today $400,000. Crediting this amount to our account, and oblige. J. M. Fiske & Company." This sum was credited on the firm's deposit account, on which there was already $36,239.47. Before noon, the bank certified and afterwards paid checks for $276,679.67. Between eleven and twelve, the cashier, hearing that there was trouble in the stock market and with J. M. Fiske & Company, ordered that no more checks should be paid or certified. He then went to the brokers' office, saw Mr. Sherwood, a member of the firm at about twelve, and after getting an evasive answer to an inquiry as to the rumor, said that the firm had made no deposits on that day, and was told that one was on its way. ($54,048.08 were in fact paid in after the cashier's order to stop payment.) He then told Mr. Sherwood that he had better give him some securities, that he ought to give additional securities on the bank's loans, and after consultation, Mr. Sherwood did so, and the cashier returned to the bank. We may assume for purposes of decision that the securities, with a small exception, were obtained by the use of the clearance loan.

At forty minutes after twelve, the brokers gave notice to the stock exchange that they were unable to meet their obligations, and an involuntary petition in bankruptcy was filed against them at twenty-five minutes past three. This suit is for the proceeds of the securities (which were sold by the bank), and for the sum deposited as we have stated. In view of our decision in the other case, only one or two matters need mention. It is somewhat more pressed that the bank had not reasonable ground to believe that the brokers' property, at a fair valuation, would be insufficient chanroblesvirtualawlibrary

Page 231 U. S. 67

to pay their debts, and therefore had not ground to believe that the brokers were insolvent within the meaning of the Bankruptcy Act, § 1(15), 30 Stat. 544. We think it too plain to need argument that the findings below that the firm was insolvent, knew that it was insolvent, and intended a preference, were correct. These brokers were ruined by the collapse of the pool mentioned in the other case, and apart from any knowledge that the bank may have had as to their interest in the stock concerned, the entirely unusual course of the cashier in leaving his bank to get additional security (not merely proceeds of the clearance loan upon a claim of lien), and the circumstances are sufficient to prevent our going behind the finding below. Really no other conclusion could have been reached.

On the question of lien, the evidence does not differ enough from that in the other case to need further discussion. The bankrupts were under an agreement with the bank, of the usual sort, giving the bank a general lien on all securities in its hands for all liabilities of the firm, and a right to require additional approved securities to be lodged with it, etc. But a general promise to give security on demand puts the creditor in no better position than an agreement to pay money. Sexton v. Kessler, 225 U. S. 90, 225 U. S. 98.

The so-called deposit of $54,048.08 was paid in after the cashier had forbidden the payment of checks against the deposit account, and therefore rightly was held to be a payment and a preference. A set-off properly was denied.

Decree affirmed.

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