U.S. Supreme Court
Buchanan v. Smith, 83 U.S. 16 Wall. 277 277 (1872)
Buchanan v. Smith
83 U.S. (16 Wall.) 277
1. A creditor has reasonable cause to believe his debtor "insolvent" in the sense of the Bankrupt Act when such a state of facts is brought to his notice respecting the affairs and pecuniary condition of his debtor, as would lead a prudent businessman to the conclusion that he, the debtor, is unable to meet his obligations as they mature in the ordinary course of business.
2. A debtor "suffers" or "procures" his property to be seized on execution when, knowing himself to be insolvent, an admitted creditor who has brought suit against him -- and who he knows will, unless he applies for the benefit of the Bankrupt Act, secure a preference over all other creditors -- proceeds in the effort to get a judgment until one has been actually got by the perseverance of him the creditor and the default of him the debtor.
3. Such effort by the creditor to get a judgment, and such omission by the debtor to "invoke the protecting shield of the Bankrupt Act" in favor of all his creditors, is a fraud on the Bankrupt Act, and invalidates any judgments obtained.
4. The fact that the debtor, just before the judgments were recovered, may have made a general assignment which he meant for the benefit of all his creditors equally does not change the case. Such assignment is a nullity.
The Cascade Paper Manufacturing Company of Penn Yan, New York, had for a long time purchased things used in the manufacture of paper, of Buchanan & Co., merchants in the City of New York, and had habitually given notes in payment. chanrobles.com-red
Its dealings with them were considerable, and its credit so good that it was not limited as to time; that when extensions were asked they were given, and that up to March 3, 1869, its notes had never lain over or been protested for nonpayment. The notes of the company were endorsed by its officers individually, except in one instance, when accident prevented. On the 3d of March, 1869, however, the company were unable to meet a note to Buchanan & Co., which came due on that day, and telegraphed the fact to these last, adding that they had sent that day a draft for half the amount, and a new note at thirty days for the balance. Buchanan & Co. replied (apparently by telegraph on the same day), that they would protect the note; but in a letter of March 4 reciting these facts (apparently not having received the promised half remittance and new note), they say:
"We are much disappointed at not receiving anything from you today. What does it mean? We had used the note, and it was not at all convenient for us to take care of it at so short notice. We shall certainly expect to hear from you by next mail."
On the 21st of March, 1869, the company's mills were destroyed by fire. The loss was about $80,000; the insurance $45,000 or $47,000. From that time, the company did no more business; and, as it afterwards appeared, it was from that time insolvent. At the time of the fire, Buchanan & Co. held six notes of the company, to-wit:
One for $1,000, due March 25, 1869.
One for $2,501, due April 2, 1869.
One for $1,141, due April 6, 1869.
One for $2,293.19, due May 4, 1869.
One for $2,305.94, due June 4, 1869.
One for $2,318.69, due July 3, 1869.
Two days after the fire the company wrote to Buchanan & Co., informing them of the fact, and, apparently, of the magnitude of their loss. These last replied March 23, expressing sympathy, and "a trust that when you get things more settled, they may not turn out as bad as you now expect." chanrobles.com-red
They promised in the same letter to take care of the note of the company due the 25th, and to advise in a few days about the other coming due April 2.
Just before this fire, Mr. Goodwin, one of the firm of Buchanan & Co., had set off on a tour of business, westward. He reached Penn Yan immediately after the fire, and had an interview with the officers of the company, who informed him of the amount of their loss and insurance, and spoke of the notes, and said,
"On account of our misfortune of burning, we shan't be able to meet those notes. Of course we can't get the insurance money in, and you will have to be easy with us, and wait; but will get your pay in full."
They said that all they wanted was their insurance money to pay all they owed, and as soon as they got that, they would commence to pay. They asked to have the notes renewed, which was afterwards done. They said the concern would be solvent if they got their insurance money, and expressed their expectation of getting it. No statement was made of the company's debts, and Buchanan & Co., according to their own positive testimony, had no knowledge of any particulars, or of the fact of their debts beyond supposition.
The following letters from Buchanan & Co. now were written. What replies, if any came back, did not appear.
"NEW YORK, March 29, 1869"
"THE CASCADE PAPER COMPANY"
"GENTLEMEN: In relation to renewal of notes, we shall do everything we reasonably can, though we cannot really afford to renew a single one. You must take into consideration that our Mr. Buchanan has recently met with a greater loss by fire, with less than half the amount of insurance you have, and we really need all the money we can command. We have taken care of the $1,000 note due 25th, and you will please send us now note with your individual endorsements, and at as short time as possible. Can't you possibly take care of the one due April 2d and 6th? You see our position, and we trust you will meet the matter accordingly."
"BUCHANAN & CO."
"NEW YORK, April 2, 1869"
"THE CASCADE PAPER COMPANY."
"GENTLEMEN: Your note for $2,501 is payable today, and up to this time (2 P.M.) we hear nothing from you in regard to it. We shall be obliged to have it protested if we do not hear from you in time. You have not sent us new endorsed note for the $1,000 payable March 25. We trust in these matters you will only rely upon us, as a question of necessity, and not of convenience. Money is very tight, and we need all that is due us."
"BUCHANAN & CO."
"NEW YORK, April 30, 1869"
"THE CASCADE PAPER COMPANY"
"GENTLEMEN: Yours of 29th instant, with enclosure, at hand. We are surprised that you should request us to extend your note due May 4, for your superintendent, Mr. Joy, gave the writer to understand most distinctly that should be paid when due. This he said to him when at your place in March. Mr. Joy then said if we would renew some notes due about that time (which we did) everything would be met promptly after that. We have been obliged to use that note due the 4th proximo, and we are not in a position to take it up. Our payments about this time are exceedingly large, much greater than usual, and we have need of every dollar we can raise to pay our own liabilities. We cannot, therefore, renew your note. You certainly can in some way, with your connections, raise the money, and, if necessary, you ought to be willing to make any sacrifice to do it. If in no other way, we should suppose you could get an advance for the amount you need on your insurance policies. At any rate, gentlemen, you must in some way contrive to pay the note, for we are not in a position to renew it for you."
"BUCHANAN & CO."
"NEW YORK, June 5, 1869"
"MR. W. C. JOY,"
"Superintendent of the Cascade Paper Company"
DEAR SIR: We were very much surprised and very greatly incommoded by getting notice this morning of protest of your note due yesterday, 4th instant, for $2,305.94. Have telegraphed you for explanation, and up to this time, 2 1/2 o'clock, have received chanrobles.com-red
no reply. This note had been discounted, and as we had heard nothing from you to the contrary, we supposed, of course, it would be paid. You promised us when we had to take up the last one, that after that all your notes would be promptly met. Please attend to it at once, and send funds. What are we to expect in regard to your note due us next week, the 7th instant, for $4,701.42? We assure you we are not in a position to take care of that. You must provide the funds to pay that. You have no idea how short we are just at this time, and what a disappointment and trouble it has been for us today to take care of your note due yesterday. Let us hear from you at once.
"BUCHANAN & CO."
"NEW YORK, June 9, 1869"
"MR. W. C. JOY"
"Superintendent of the Cascade Paper Company"
"DEAR SIR: Since writing you yesterday, we learn the Manhattan Insurance Company paid you some time since about $5,000. Under the circumstances, think you should have paid us something on account."
"As we understand the matter, there is, beside the Buffalo company, unpaid as follows:"
Home, N.H. . . . . . . . . . . . $10,000
Columbia, N.Y. . . . . . . . . . 3,000
Market, N.Y. . . . . . . . . . . 3,000
Atlantic. . . . . . . . . . . . . 3,000
"On which there is due about $18,500."
"We do not know how serious the difficulties in the way of collecting from these companies may be, but from such information as we have been able to obtain, fear you may underrate them. Under the circumstances we think you should assign your claims against these companies to us, or at least enough of them to cover our claim, which, in round figures, is about $12,000."
"The chances of collection in our hands will be quite as good as in yours, and probably a good deal better. If you are correct in assuming that their refusal to pay is the result of Woodruff's interference and management, the assignment to us would be the very best means you can adopt to avoid litigation and loss. We suppose you have a board of trustees, and that in case
you make the assignment it will be proper to have a meeting and authorize some officers of the company to execute the assignment. Please let us hear from you by first mail."
"BUCHANAN & CO."
"NEW YORK, June 12, 1869"
"G. R. YOUNG, ESQ.,"
"President of the Cascade Paper Company"
"DEAR SIR: We hold the following notes of the Cascade Paper Company, payable to the order of yourself and Mr. W. C. Joy, and endorsed by you both, viz.:"
One due May 4 at Metropolitan Bank, N.Y. . . $ 2,293.19
" June 4 " " " " . . 2,305.94
" " 7 " " " " . . 4,701.42
" July 4 " " " " . . 2,318.69
"For the note due May 4, we hold as collateral another note of the company for $2,318.70, due July 1st, endorsed same as the others. All the above notes excepting the one due July 4 have been protested for nonpayment. We have from time to time renewed all these notes at the request of Mr. Joy and Mr. Raplee, treasurer of your company, for reasons given by them at the time. The last excuse given us was that they were waiting for their insurance money. Now as the company have, to our knowledge, collected a large portion of their insurance money, some $20,000 or more, we think we are entitled to our money and that we are, under all the circumstances, very unfairly treated. We have this day written Mr. Joy, as superintendent of the company, requesting him to remit us by return mail at least one-half of the amount of our account, and at the same time informing him if it was not done, we should at once instruct our lawyers to commence suits against yourself and Mr. Joy as endorsers. We thought it best to inform you how this matter stood as you might not be fully informed in regard to it."
"BUCHANAN & CO."
"In the month of June or July," as was testified by the superintendent of the company, "it became apparent to its officers that the company could not meet its engagements." chanrobles.com-red
On the 19th of the June thus spoken of by the superintendent -- that is to say June, 1869 -- Buchanan & Co. brought suit in the supreme court of New York against the company and the individual endorsers, Joy and Young, the former superintendent and the latter president of the company, upon the two notes which had fallen due June 4 and June 7, respectively, and immediately after the two notes due July 1 and July 3 fell due, a suit was brought upon those notes also.
"At the time the suits were commenced," testified the superintendent in May, 1870, when he was examined, "I should say, from my present standpoint, the company was insolvent." There was no proof in the present proceeding that, when these suits were brought, any debts of the company had matured, except those of Buchanan & Co., and $229 due one Jones.
Each member of the firm of Buchanan & Co., which consisted of four persons, was examined as a witness, and they all testified that their information and belief was, that the company was perfectly solvent, and intended to pay everybody in full; that they commenced the suit because they thought that the company's delay had been unreasonable and unnecessary; that the officers of the company were keeping the insurance money, which ought to be paid to them, and speculating with it, and because the company had promised to pay as soon as they got the insurance money, and had collected nearly $30,000 of it without paying anything; that the suits were not brought nor anything done subsequently, under any understanding, request, or suggestion of the company; but, on the contrary, that the company requested them to wait longer, and begged them not to think of bringing a suit; that they brought the suit for the purpose of getting their pay by any legal means; that they did not consider the question whether other parties would get their pay or not, for that they did not know that the company owed anybody else.
It appeared in the evidence that the company pleaded in the suits on the notes a misnomer in abatement, and that chanrobles.com-red
Buchanan & Co. made a motion to correct the misnomer, and to strike out the answer as "sham," and for judgment on it as "frivolous." The motion to amend was granted. The company's counsel then insisted that the plaintiffs must reserve their complaint as amended, and the company have the usual time to answer. In a discussion before the court upon this point, the plaintiff's counsel (according to his statement as given in the present suit) insisted as a matter of argument that where delay was the only object sought by a defendant which did not deny its obligation, delay might work injury to the plaintiffs by enabling other parties to gain a priority in case of insolvency. And he suggested insolvency as a possible inference, from the application for delay, for the court to consider upon such a motion. He did not assert it as a fact, and as he testified he had no knowledge or information on the subject and no decided belief on the subject of their solvency or insolvency. The company's counsel emphatically denied the suggestion of insolvency, and objected to any such inference's being drawn. The judge said there was no proof on the subject, and gave the company ten days to answer. The company's counsel testified that the statement of insolvency was positively made by the counsel of Buchanan & Co., but admitted that there was nothing in the papers one way or the other upon the subject; that it became a matter of argument upon the assertions of counsel made in court, the plaintiff's counsel saying that the company was insolvent and the company's counsel saying that he did not believe it was insolvent, and he admitted that he did, in fact, believe they were solvent, and did say that he so believed in the argument. This argument was made on the 19th or 20th of July.
On the 19th of July, a judgment against the company for $229 was recovered by one Jones, which was subsequently satisfied on execution. But Buchanan & Co. testified that they had no knowledge or information of these facts.
On the 21st of July, 1869, the company made a general assignment of all their property and effects to one Benjamin Hoyt in trust to pay their creditors. This assignment was chanrobles.com-red
made under advice of reputable counsel, who advised the company that they might lawfully make it, and that it would be valid. "The company supposed," according to the testimony of their superintendent,
"that the title to all their property would pass to Hoyt, and they intended to have it so pass by the assignment. They intended it should so pass before Buchanan & Co. could get their judgments and issue executions. They knew when the assignment was executed that this firm would shortly be entitled to enter judgments, and it was the intention on the part of the company in making the assignment to Hoyt to prevent them from gaining a preference by means of their judgments. They expected and intended that no property would be left on which they could get any lien. They did not expect or intend that Buchanan & Co. should get a preference over their other creditors; but intended by the assignment to secure an equal distribution of their property to their creditors, and to prevent any creditor from getting a preference. The officers of the company consulted together in reference to the assignment. There was not any difference of view."
The members of the firm of Buchanan & Co. testified that no information of this assignment was given to them, and that they had no knowledge of it until after their liens had attached as hereinafter mentioned.
On the 3d of August, no defenses having been entered in any of the suits, Buchanan & Co. recovered judgments against the company in them by default, and against Joy & Young, endorsers on the notes. On the same day, their attorneys sent transcripts of the judgments to the clerk of Yates County, in which the company's real estate was situated, to be docketed by him, and the same were docketed by him on the 4th day of August.
On the same 3d day of August, the attorneys of Buchanan & Co. also issued executions on the two judgments to the Sheriff of Yates County, wherein personal property of the company was situated, which executions were received by the sheriff on the 4th of August, and were sufficient in form to become liens on that day under the statutes of the State chanrobles.com-red
of New York, upon all the personal property of the defendants within that county. On the 4th of August, Buchanan & Co. commenced, under the said judgments, certain proceedings supplementary to execution (which are the substitute under the New York code for a creditor's bill), and thereby obtained an equitable lien upon all the choses in action of the company, which proceedings subsequently resulted in the appointment of B. Buchanan (a member of the firm) as receiver.
The different members of the firm testified that at the time of commencing the suits and at the time of recovering and docketing the judgments, issuing the executions and commencing the supplementary proceedings, they did not actually believe that the company was insolvent or in contemplation of insolvency, and so far as they were aware, neither of them had any reasonable cause so to believe, but, on the contrary, their belief in fact was, and as they supposed their information warranted the belief, that the company was perfectly solvent. They each further testified that so far as they were aware, they had no cause to believe that the company had any intention, view, or desire of giving a preference to their firm or making any disposition of property in its favor or in fraud of the Bankruptcy Act; but, on the contrary, they in fact believed that the company was resisting their proceedings with the purpose of delaying, and so far as possible preventing their obtaining payment of their claims; that their information and belief was that the company did all it could to prevent the judgments, executions, and receiverships; that they thought it a part of the company's plan not to give them a preference or allow them to get any if it could help it; that it was doing all it could to prevent their getting any preference; and that they had no facts nor any cause to believe that it was showing or permitting them any favor.
The Sheriff of Yates County, on receiving the executions, August 4, called upon the officers of the company, and they all said that an execution could not touch the property; that they had made an assignment, and that it was in Hoyt's chanrobles.com-red
hands, and they supposed that that would exempt the property from levy. They objected to the levy. The sheriff also called on Hoyt, who said there was a general assignment of the company made to him, that he had possession of all the property, and that he thought the sheriff had no right to make a levy. So the sheriff did not levy at that time.
When the attorneys of Buchanan & Co. sent the transcripts of judgments to the Clerk of Yates County on the 3d of August, they wrote him a letter in which they requested him to docket the judgments and also to inform them whether there were any other judgments against any of the defendants or any assignment or transfer of property by any of them, and if so for a memorandum thereof. The clerk sent back the letter with a memorandum of a judgment recovered by Jones against the company for $229, July 19, and also of "general assignment, dated July 21, 1869, B. L. Hoyt, assignee." This letter was received by Buchanan & Co.'s attorneys August 5. This was the first information, as they testified, which they or their attorneys, so far as they knew, had ever received of the existence of the assignment or of any judgment against the company other than their own. The attorneys sent for a copy of the assignment and received it on the 7th of August. Mr. Goodwin, one of the firm, went at once to Penn Yan to investigate the circumstances. He arrived there on the 9th and remained there till the 13th. On arriving at Penn Yan, he saw the sheriff, who informed him that the company had made an assignment and there was not anything to levy on. He also saw Mr. Hoyt, who asserted that the property had vested in him as assignee. He also saw the officers of the company, who said that they had made an assignment of the property which the company formerly owned, and that the assignment was good and valid. Under advice of counsel, Goodwin directed the sheriff to levy, and gave him the bond of indemnity required by him. The sheriff levied on the personal property of the company August 13.
By orders of the supreme court made in the supplementary proceedings August 13 and 16, Buchanan was appointed chanrobles.com-red
receiver of the unpaid policies of insurance held by said company, and on the 20th, 21st, and 23d of August commenced suits on them against the insurers, to recover the losses due the company, which suits were still pending.
On the 9th of September, a petition in bankruptcy was filed against the company, on which, September 24, it was adjudicated bankrupt, and one Smith appointed its assignee.
The inventory of the assets and liabilities of the firm filed July 21, 1869, showed:
Liabilities . . . . . . . . . . . $74,775.00
Assets. . . . . . . . . . . . . . 41,435.00
Deficit . . . . . . . . . . . . . $33,340.00
Among the assets were:
Cash in hands of Treasurer . . . . $6,554.70
Claims against insurance
companies for loss by fire . . . 14,545.30
Hereupon Smith filed a bill in the court below against Buchanan & Co., which, after setting forth the appointment of the complainant as assignee, alleged that the judgments in favor of Buchanan & Co. against the company were suffered and procured by the company with intent to give that firm a preference over the other creditors of the company, and with intent to hinder, delay, and impair the operation of the Bankrupt Act, and that that firm, when they entered their judgments and issued their executions, had reasonable cause to believe that the company was insolvent, and that a fraud on the act was intended.
The bill also alleged the illegality of the appointment of the defendant, Buchanan, as receiver of the insurance claims.
The answer set forth the recovery of the judgments, the issuing of the executions, the levies thereunder, and the appointment of the receiver, and put in issue all the allegations of fraud in the recovery of the judgment, and any knowledge on the defendants' part of the insolvency of the company.
The court below gave judgment for the complainant, chanrobles.com-red
granting the relief asked in the bill, and setting aside the judgments under which the defendants claimed their lien.
From that decree this appeal was taken.
It was admitted on both sides in the argument that by the terms of the Bankrupt Act it was necessary that three things should concur to entitle the complainant, as assignee, to the decree prayed in the bill:
1st. That the company, within four months before the filing of the petition against them in bankruptcy, did "procure or suffer" their property, or some part thereof, to be attached, sequestered, or seized on execution by Buchanan & Co., with a view to give them a preference.
2d. That the company was insolvent at that time, or in contemplated insolvency.
3d. That Buchanan & Co., at the time the company "procured or suffered" such attachment, sequestration, or seizure of their property (if they did so "procure or suffer" it) had reasonable cause to believe that the company was insolvent, and that they procured or suffered such attachment, sequestration, or seizure of their property to be made to secure such preference and in fraud of the provisions of the act. chanrobles.com-red