Western Tie & Timber Co. v. Brown - 196 U.S. 502 (1905)
U.S. Supreme Court
Western Tie & Timber Co. v. Brown, 196 U.S. 502 (1905)
Western Tie and Timber Company v. Brown
Argued January 5, 1905
Decided February 20, 1905
196 U.S. 502
The bankrupt was largely indebted to a corporation whose laborers purchased supplies from him; periodically he rendered the corporation a statement of amounts due from its laborers which it deducted from their wages and remitted to him in a lump sum. Prior to, and within four months of, the filing of the petition, the corporation several times deducted from its payroll amounts aggregating over $2,000, so due by its laborers, but did not pay them over, and, on filing its claim, it embodied as an integral part thereof the amounts so deducted and retained as a proper credit or offset. The circuit court of appeals found that the corporation retained the amounts with the knowledge of the bankrupt's insolvency and with the intention to secure a preference to that extent thereby, but that the bankrupt had no such intention, and ordered that the entire claim be expunged unless the corporation paid the amount so retained to the trustee. On appeal, objections were taken to the jurisdiction of this Court. Held that
As the claim to setoff is controlled by and is necessarily based on the provisions of § 68 of the Bankrupt Act, and its construction is necessarily involved, and the question is one which might have been taken to this Court on appeal or writ of error from the highest court of a state, this Court has jurisdiction of the appeal.
Under the facts as found below, the deductions from payroll did not give rise to a voidable preference, nor was the corporation entitled to credit them as a setoff, as they were not mutual debts and credits within the setoff clause of the Bankrupt Act, but were collections made independently
of other transactions and as trustee for the bankrupt. The corporation was entitled to prove its gross debt with the alleged setoff eliminated and was a debtor to the bankrupt for the amount of such deductions, and the court below has power to protect the bankrupt's estate in respect to dividends to the corporation in case it should not discharge its obligations.
This is an appeal from a decree of the Circuit Court of Appeals for the Eighth Circuit, affirming, as modified, an order of the District Court of the United States for the Eastern District of Arkansas directing that the claim of the Western Tie & Timber Company against the estate of S. F. Harrison, a bankrupt, be expunged unless the company paid to the trustee in bankruptcy a specified sum, found to have been transferred to the company by the bankrupt, and decided to have operated a voidable preference. 129 F. 728.
The facts were thus found by the circuit court of appeals:
"1. On February 24, 1903, a petition to procure an adjudication that S. Frank Harrison was a bankrupt was filed in the District Court of the United States for the Eastern District of Arkansas, and Harrison was then adjudged a bankrupt."
"2. The Western Tie & Timber Company was a corporation and a creditor of Harrison. It presented a claim against his estate in bankruptcy of $24,358. The trustee moved to expunge this claim on the ground that the tie company had secured a voidable preference. The district court ordered the claim expunged unless the tie company should pay to the trustee $2,210.73, and an appeal from this order was taken."
"3. For some years prior to February 24, 1903, the tie company and Harrison had been engaged in removing timber from land of the former, and converting it into ties, which the company received and sold. For many months prior to October, 1902, Harrison had owned and conducted stores in the vicinity of the places where the work of cutting and hauling the ties was carried on, and had furnished the laborers engaged in that work with groceries and other supplies. These laborers and Harrison were paid by the tie company in this way: once in two or four weeks, an inspector sent to the tie company a payroll,
on which the name of each laborer, the amount he had earned, and the value of the supplies he had received from Harrison appeared. The company deducted from the earnings of each laborer the value of the supplies the laborer had received, and sent him a check for the balance. At the same time, it sent to Harrison a check for the aggregate amount of the supplies which he had furnished to the laborers."
"4. Four months before the filing of the petition in bankruptcy, or October 24, 1902, Harrison owed the tie company more than $20,000."
"5. Between December 27, 1902, and February 24, 1903, the company refused to pay to Harrison, retained and credited on its claim against him $2,210.73, which was due him for supplies he had furnished to the laborers subsequent to November 30, 1902."
"6. At all times when the amounts which aggregate $2,210.73 became due and were retained by the company, Harrison was insolvent, the tie company knew that fact, and it intended, by retaining these amounts, to secure to itself a preference over the other creditors of the insolvent, but Harrison had no such intention."
"7. After the company had retained several hundred dollars of the amount due Harrison for the supplies, it advanced to him $75 under a new and further credit."
An appeal to this Court was allowed by the presiding circuit judge of the circuit court of appeals.