CATE v. CERTAIN TEED PRODUCTS CORPORATION (1943)

This is an appeal from a judgment in an action brought by a trustee in bankruptcy to recover alleged preferences given by the bankrupt to defendant. Judgment was rendered for defendant and this appeal followed.

It is alleged in the complaint, and denied in the answer, that a petition to declare the Central Valley Wholesale Lumber Company (hereinafter called Central Valley) a bankrupt was filed on June 24, 1939. There is no finding on this question but as no question is raised on this subject here we will assume that the petition was filed on that date which was less than four months after the alleged preferences were given. This is important in a case of this kind. Sec. 96, Title 11 U.S.C.A.

Central Valley was a wholesale lumber dealer with its principal place of business in Fresno, California. Certain–Teed Products Corporation (hereinafter called Certain–Teed) dealt in certain kinds of builders supplies.

Central Valley commenced purchasing supplies from Certain–Teed in June, 1938. It was given thirty days credit on some merchandise and sixty days credit on other goods. It fell behind in its payments and some deliveries received in August, 1938, were not paid for until January, 1939. Deliveries in and after September, 1938, were not paid for until March, 1939, which payments constitute the transactions involved here. The credit manager of Certain–Teed testified that he suspended the credit of Central Valley during the last of November, 1938, though one exhibit indicates that some merchandise of small value was delivered in December.

On September 29, 1938, Certain–Teed received a report from Dun & Bradstreet showing that Central Valley had assets of the value of about $27,000 more than its liabilities. A balance sheet was attached showing an operating loss of $281.50 between August 17 and August 31, 1938. Other reports were received showing that Central Valley was slow in paying some of its bills and prompt with others. A report was received in January, 1939, warning Certain–Teed that the account should be watched. A credit statement was then made to Certain–Teed by Dun & Bradstreet based on oral statements of Bert LeCrone, manager and principal stockholder of Central Valley, that the latter had increased its net worth to about $30,000.

On March 1, 1939, Central Valley owed Certain–Teed $1,956.36, all of which was past due. On March 2nd C. E. Parker, credit manager of Certain–Teed, went to Fresno to secure a settlement of the indebtedness. He found the place of business of Central Valley under attachment with a keeper in charge.

Central Valley had an arrangement with the Commercial Credit Company to secure working capital. When a sale was made the bill was assigned to Commercial Credit Company and Central Valley received 75% of its face value in cash. 25% was retained by Commercial Credit Company to cover possible losses in collections. By March 1, 1939, a credit in favor of Central Valley had accumulated from those collections.

Parker secured an order from Central Valley on Commercial Credit Company for $1,400, and a check on its bank for $506.36. The check, while given on March 2nd, was post dated March 6th. This check was deposited for collection on March 6th but was returned because of insufficient funds. It was again sent through the banks for collection but payment was refused a second time for the same reason. Central Valley's bank balance was $42.14 on March 7th, $3.55 on March 8th, and $.78 on March 15th. The balance did not exceed $129.80 at any time during March.

Commercial Credit Company accepted the order for $1,400 on March 3, 1939. Parker made no investigation of the financial condition of Central Valley at the time he received the payments, but testified he did not suspect that it was insolvent.

On March 15, 1939, Dun & Bradstreet notified Certain–Teed that Central Valley had published notice of a bulk sale of its merchandise to be effected on March 21, 1939. Parker pressed for payment of the check which had been dishonored twice and it was discovered that the balance due Certain–Teed was $556.36 after crediting the order for $1,400. The bulk sale was completed on March 21, and LeCrone purchased a certified check for $556.36 and mailed it to Certain–Teed on that day. It was cashed and thus Certain–Teed received payment of its bill in full.

It seems to be the rule that where a preference is claimed, it occurs when the transaction is completed so that no bona fide purchaser could acquire rights adverse to the creditor. In re Aughenbaugh, D.C., 33 F.Supp. 671; Brown Shoe Co. v. Carns, 8 Cir., 65 F.2d 294; Irving Trust Co. v. Jacob Weckstein & Sons, 2 Cir., 64 F.2d 333. Thus we have here two separate alleged preferences which must be weighed by the facts known or apparent to the creditor at the time each occurred. The first was on March 3, 1939, when Commercial Credit Company accepted the order drawn on it for $1,400. The second was on March 21, 1939, when the certified check for $556.36 was mailed to Certain–Teed.

In cases of this kind the plaintiff has the burden of proving three elements in order to succeed. Barbour v. Priest, 103 U. S. 293, 26 L.Ed. 478; Canright v. General Finance Corp., D.C., 35 F.Supp. 841.

He must first prove that the debtor was insolvent at the time of the alleged preference. As we have observed, there was an issue presented by the pleadings on this question but the trial court failed to find on it. The books of the debtor showing that at the time of the transactions it had assets in excess of its liabilities do not necessarily demonstrate its solvency and may not excuse further investigation by the creditor on the question of solvency. Prudential Insurance Co. v. Nelson, 6 Cir., 96 F.2d 487; Grandison v. National Bank of Commerce, 2 Cir., 231 F. 800. Nor can oral statements by the debtor be given greater weight. Teiger v. Stephan Oderwald, Inc., D.C., 31 F.Supp. 626. In determining the question of solvency the property of the debtor must be estimated at its true or actual value and not at the value placed upon it by the debtor. Mansfield Lumber Co. v. Sternberg, 8 Cir., 38 F.2d 614.

The evidence taken at the trial, principally that of LeCrone, shows rather clearly that Central Valley was insolvent both before and after March 2, 1939. Among its assets which were carried on its books at face value was a debt of over $9,000, owed by a bankrupt, that was wholly uncollectable. LeCrone had overdrawn his account several thousand dollars and could not pay this debt. The buildings and lumber sheds of the company, which were on leased ground, were carried on the books at a valuation of over $6,000. They were sold in March, 1939, for $1,500. The principal assets of Central Valley consisted of accounts receivable. A considerable majority of them were over due and at the time of the alleged preferences were not reasonably worth the face value at which they were carried on the company books. It therefore appears that Central Valley was insolvent at the times of both the alleged preferences and the trial court should have so found. Plaintiff estimates that the creditors will receive thirteen cents on the dollar if he is unsuccessful in this action. However, in Cusick v. Second National Bank, 73 App.D.C. 16, 115 F.2d 150, it was held that if there was no issuable question of fact on the reasonable belief of the creditor on the matter of the insolvency of the debtor, and the finding on that question is in favor of defendant, as it is here, the failure to find on the question of insolvency does not constitute reversible error.

The second element which must be proved by the plaintiff is that the alleged preferences occurred within four months from the date the petition in bankruptcy was filed. Sub. a, Sec. 96, Title 11 U.S.C.A. As we have observed, the pleadings put this question in issue and there is no finding on it. The question is not argued here and it seems to have been assumed at the trial that the petition was filed in due time. We will therefore make the same assumption here.

The third element to be established by plaintiff in order to set aside an alleged preference is that “the creditor receiving it or to be benefited thereby or his agent acting with reference thereto has, at the time when the transfer is made, reasonable cause to believe that the debtor is insolvent.” Sec. 96, sub. b, Title 11 U.S.C.A. The trial court here found that the creditor had no such reasonable cause to believe that its debtor was insolvent.

It is thoroughly settled that although the creditor may not have had actual knowledge of facts which would have reasonably caused a belief that the debtor was insolvent, still if it has knowledge of facts that would have caused a reasonable person to make inquiry concerning the solvency of the debtor, it should be charged with knowledge of such facts as would have been disclosed by such reasonable inquiry. It is also held by the Federal courts that the question of whether or not the creditor had reasonable cause to believe that the debtor was insolvent at the time of the alleged preference is one of fact for the trier of fact where there is any conflict in the evidence on the subject. See, Campanella v. Liebowitz, 3 Cir., 103 F.2d 252; In re Campion, D.C., 256 F. 902. This conforms to the settled rule in California that where there is any substantial evidence or reasonable inferences to be drawn from it supporting the findings the judgment will not be reversed on appeal because of a lack of evidence to support the findings of fact.

It has also been held that the fact that the debtor was behind in his bills, and had failed to meet them promptly when due, and that his credit had been suspended under the rules of a merchant's association so he was permitted to purchase merchandise for cash only, were not sufficient to put the creditor receiving the alleged preference on inquiry as to the solvency of the debtor. In re Eggert, 8 Cir., 102 F. 735. Such knowledge has been held to be sufficient to cause a suspicion of, but not a reasonable belief of, insolvency. The approved and followed rule of suspicion of insolvency is stated in Grant v. First National Bank, 97 U.S. 80, 81, 24 L.Ed. 971, as follows: “Some confusion exists in the cases as to the meaning of the phrase, ‘having reasonable cause to believe such a person is insolvent.’ Dicta are not wanting which assume that it has the same meaning as if it had read, ‘having reasonable cause to suspect such a person is insolvent.’ But the two phrases are distinct in meaning and effect. 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 security taken 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.” See, also, Simandl v. Paragon Paint & Varnish Corp., D.C., 8 F.Supp. 1011, and cases cited.

It has been held that knowledge by the creditor of dishonored checks given by the debtor is sufficient notice of probable insolvency to require the creditor to make inquiry concerning the solvency of the debtor. In Brown Shoe Co. v. Carns, supra [65 F.2d 297], it was said: “While it has been held that the knowledge of the failure of a debtor to discharge his obligations promptly is alone insufficient to establish reasonable cause to believe that a preference is being effected [Citing cases], knowledge of dishonored checks has been considered as evidence tending to show reasonable cause for such belief. Pittsburgh Plate Glass Co. v. Edwards [8 Cir.], 148 F. 377; Grandison v. National Bank of Comm. of Rochester [2 Cir.], 231 F. 800, 809; Lowenstein v. Salop, [2 Cir.], 55 F.2d 889, 891; Buchanan State Bank v. De Groot [6 Cir.], 39 F.2d 397, 398; R. H. Herron Co. v. Moore [9 Cir.], 208 F. 134, 136; Conners v. Bucksport Nat. Bank, D.C., 214 F. 847, 850 affirmed, [1 Cir.], 216 F. 990; Williams v. Plattner, D.C. 46 F.2d 467, 468; 4 Remington on Bankruptcy (3d Ed., 1923) Sec. 1832.” See, also, In re Campion, supra; Pender v. Chatham Phenix Nat. Bank & Trust Co., 2 Cir., 58 F.2d 968.

It has also been held that knowledge of the giving of a chattel mortgage by the debtor on its merchandise in bulk should put the creditor on his inquiry as to the solvency of the debtor. In re Kent's, Inc., D. C., 9 F.Supp. 216.

When we consider the knowledge of Certain–Teed as to the first alleged preference, measured under the foregoing rules, we find the following facts brought to its attention: Central Valley had been slow in paying its accounts for several months. On March 2, 1939, Parker found its visible assets under attachment and a keeper in charge. Central Valley could not pay its bill in cash but gave an order on a credit it had with Commercial Credit Company and also a postdated check. While these transactions were unusual, and most certainly would have supported a finding that Certain–Teed should have made inquiry as to the solvency of Central Valley, and should have been charged with the facts such inquiry would have disclosed, we do not find it necessary to hold that the inference drawn from them by the trial court to the effect that they did not contain sufficient warning of insolvency to require Certain–Teed to make inquiry is wholly without evidentiary support.

Certainly it cannot be said there was no issuable question of fact presented by the evidence on the question of reasonable belief of the insolvency of the debtor to excuse a finding on the question of its actual insolvency under the rule announced in Cusick v. Second National Bank, supra.

In considering the second payment to Certain–Teed on March 21, 1939, we find that in addition to the foregoing facts, the following were known to Certain–Teed: The check for $506.36 had been twice dishonored and Central Valley was selling its stock in trade in bulk. We cannot distinguish between the effect of the mortgage of a stock in trade in bulk by a debtor and its sale in bulk as far as notice to the creditor is concerned. If the mortgage of a stock of trade in bulk is a warning to a creditor of the probable insolvency of the debtor sufficient to require the creditor to make an investigation of the debtor's insolvency, a bulk sale should be held to be a like warning.

Under the authorities already cited, we must conclude that at least on March 21, 1939, Certain–Teed had knowledge of the dishonor of the check on two occasions, and the bulk sale of merchandise, which were sufficient facts pointing to the insolvency of Central Valley to require Certain–Teed to investigate the solvency of the debtor. Certain–Teed must be charged with knowledge of those facts which such an investigation would have disclosed, namely, that Central Valley was then insolvent. It follows that the finding to the effect that Certain–Teed had no reasonable cause to believe Central Valley insolvent when it received the payment of $556.36, lacks evidentiary support. Such a finding is necessary to the support of the judgment.

The judgment is reversed.

MARKS, Justice.

BARNARD, P. J., and GRIFFIN, J., concur.