Whether the one receiving property from the bankrupt before the
petition has cause to believe that he was receiving, and that it
was intended to give to him, a preference is a matter of fact, and
in an action to recover the property, the burden of proof is upon
the trustee. In this case, parties who had advanced money on forged
bills of lading in the belief that they represented the goods
actually moving from designated points of shipment and had, just
before the petition, received from the bankrupt genuine bills of
lading representing the same goods, physical possession of which
was in the carriers issuing the genuine bills, were entitled to
possession of the goods; and, under the circumstances of this case,
the substitution of the genuine for the false bills did not amount
to an illegal preference under the Bankruptcy Act.
203 F. 1023 affirmed.
The facts, which involve the right of a trustee in bankruptcy to
maintain an action for the recovery of property of the bankrupt and
what constitutes a preference under that Act, are stated in the
opinion.
Page 238 U. S. 91
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
These causes, begun at the same time, were tried and decided
together in the United States District Court, Eastern District of
Louisiana (192 F. 725), and also in the circuit court of appeals
(203 F. 1023).
Page 238 U. S. 92
The original bills, except as to details concerning times,
amounts, etc., are essentially identical; by stipulation, the
evidence in each one became part of the record in the others, and
all the appeals may be conveniently considered in a single
opinion.
The proceedings were instituted August 18, 1910, by Pyle,
trustee in bankruptcy of Steele, Miller & Company, to recover
2,494 bales of cotton in custody of an ocean carrier at New
Orleans, transfer of which by the bankrupts to appellee banks,
acceptors of their twenty-five drafts aggregating $183,048.46, it
is alleged, constituted a preference voidable under ยงยง 60a and 60b
of the bankrupt law (30 Stat. 544, 562, c. 541) as it stood after
amendments of February 5, 1903 (32 Stat. 797, 799, 800, c. 487),
and prior to June 25, 1910 (36 Stat. 838, 842, c. 412). These
sections are copied in the margin.
*
Steele, Miller & Company were merchants at Corinth,
Mississippi, engaged in exporting cotton. Scheuch & Company
were merchants and importers domiciled at
Page 238 U. S. 93
Havre, France. The Bank de Mulhouse, Comptoir D'Escompte de
Mulhouse, Societe Generale, and Credit Havrais are French banks
doing business at Havre, and Paul Chardin is a banker and cotton
merchant in that city. The Compagnie Generale Transatlantique is an
ocean carrier. It owned the steamship
Texas, and Texas
Transport & Terminal Company was its agent at New Orleans.
In 1909, the bankrupts engaged to consign large quantities of
cotton to Scheuch & Company for sale, and the latter, on their
own responsibility, arranged for reimbursement credits with the
banks, who, according to established trade custom, undertook to
accepts the drafts drawn on themselves by consignors for value of
shipments when accompanied by proper bills of lading, insurance
papers, etc., "all necessary documents." In the honest course,
Steele, Miller & Company delivered 100 bales of cotton to a
railroad carrier for through shipment to Havre, taking therefor a
bill of lading to their own order containing marks, numbers of
bales, etc., and direction to notify Scheuch & Company. The
bill with accompanying documents was then annexed to a draft for
the consignment's approximate market price, addressed to the Havre
bank and specifying (marks being changed to meet the circumstances)
"value received and charged to account R. D. A. R. 1/100 bales
cotton." This was discounted and ultimately accepted and paid. Upon
arrival at Havre, the drawee bank received and held the cotton
until reimbursed by Scheuch & Company.
Finding themselves in financial difficulties, Steele, Miller
& Company, prior to September, 1909, began to forge and use
through railroad bills of lading resembling genuine ones in all
respects. Having utilized one of these to procure discount of a
draft, they would thereafter assemble 100 bales marked with a
combination of four letters identically as designated in the false
instrument, forward
Page 238 U. S. 94
these to New Orleans, and there deliver them to an ocean
carrier, receiving a port or ocean bill of lading to their own
order, bearing the same identifying marks, etc. The genuine bill
would then be sent by mail to Scheuch & Company with
instructions to deliver to the bank holding corresponding forged
one and return the latter. Such requested exchanges were made
through a considerable period, the banks having been satisfied by a
plausible explanation that bankrupts had made some arrangement with
the carriers, and that shipments were thus expedited, given through
Scheuch & Company, who, although at first ignorant of the
frauds, were fully informed as early as March, 1910.
During December, 1909, and January and February, 1910, the
bankrupts drew the twenty-five drafts -- each for about $7,300,
approximate market value of 100 bales -- here involved on the
separate appellee banks, attaching to each a fictitious through
railroad bill of lading, and in due course these were accepted and
paid in entire good faith. Prior to April 6, 1910, while insolvent,
the bankrupts assembled in Mississippi and Tennessee the number of
bales specified by the several forged bills marked as therein
stated, shipped them to New Orleans, and there delivered them to
the Compagnie Generale Transatlantique for transportation to Havre.
The ocean carrier issued to bankrupts for each 100 bales a port or
ocean bill with same marks, etc., and placed cotton aboard the
Texas. The bankrupts promptly indorsed the genuine bills
and forwarded them by mail to Scheuch & Company, with
directions to deliver to banks holding corresponding fictitious
ones and return the latter. Deliveries were made in Havre on April
26, May 3 and 7, but because of disquieting rumors concerning
wrongful practices by others, the banks retained both forged and
genuine documents. They had no actual knowledge of the frauds
practised upon them until May 8, when information was received
Page 238 U. S. 95
concerning the receiver's bill filed during the preceding
day.
About April 20, 1910, the failure of Knight, Yancey &
Company, large exporting cotton merchants at Decatur, Alabama, was
announced, and shortly thereafter wide publicity was given to the
fact that they had made extensive use of forged through railroad
bills of lading with foreign drafts. Steele, Miller & Company
suspended payment April 29th; bankruptcy proceedings were
instituted against them May 4th; removal from New Orleans of cotton
covered by the above-described ocean bills was enjoined in a
proceeding by the receiver filed May 7, and on August 18, the
instant causes were begun.
The bill in No. 226 (typical of all) alleges:
"Steele, Miller & Company, being then insolvent, with intent
to prefer said bank of Mulhouse or Scheuch & Company, or both
of them, over their other creditors, did deposit in the United
States' mail the said port bills of lading, the said bills of
lading being addressed to Scheuch & Company, and the same
having been indorsed by Steele, Miller & Company, the object
and purpose of forwarding said port bills of lading being to
substitute the same for the forged and worthless bill or bills of
lading attached to the drafts held by the said Bank of Mulhouse or
Scheuch & Company, or both of them, and that said port bills of
lading in due course were received by Scheuch & Company and
delivered to the Bank of Mulhouse. . . . Your orator avers that the
transmission of said port bills of lading to be substituted for the
said fraudulent bills of lading was done with the intent to prefer
the said bank of Mulhouse, and that, when the said bills of lading
were mailed to the said Scheuch & Company for delivery to the
bank of Mulhouse, and were received by the said Scheuch &
Company and delivered to the bank of Mulhouse, the said Scheuch
& Company and the said bank of Mulhouse, in accepting the said
bills of lading and permitting the substitution
Page 238 U. S. 96
of the said valid and port or custody bills of lading for the
worthless bills of lading then held, knew or should have known, and
had reasonable cause to believe, that a preference was thereby
given and intended, and knew or should have known that Steele,
Miller & Company was at said time insolvent, and that the
effect of the mailing, the receipt and acceptance and substitution
of said bills of lading, was to enable the said Scheuch &
Company or the said Bank of Mulhouse to obtain payment of its said
draft, and your orator now charges that the effect of the act
hereinabove described, if maintained and permitted by this
honorable court, will be to enable the said Bank of Mulhouse or
Scheuch & Company, or both of them, to obtain a greater percent
of their said debt than any other creditor of said bankrupt, and
that such acts should be set aside. Your orator charges the acts
hereinabove complained of were performed within four months prior
to the filing of the petition of involuntary bankruptcy herein, and
your orator is advised that the act or acts complained of are
voidable at his election, and he does now elect to avoid the same
and files this his bill to avoid said transfer."
And it prays
"that, upon the final hearing of this bill, this Court will set
aside the transfer of the said 900 bales of cotton by the said
bankrupt to the said Bank of Mulhouse or Scheuch & Company, or
both of them, and hold the same void and of no effect, and decree
that the title to the said cotton and the right of possession
thereof is in your orator, and will permit your orator to take
possession of said cotton and administer the same, or the proceeds
thereof, for the benefit of the creditors."
Appellant trustee maintains that he is seeking to set aside a
preference as authorized by statute; that the French banks became
mere ordinary unsecured creditors of Steele, Miller & Company
by paying drafts with forged bills of lading attached as security,
and that, when genuine bills were substituted for spurious ones,
these banks had
Page 238 U. S. 97
positive information of the bankrupts' insolvency, any knew or
should have known that they were receiving an intended
preference.
In behalf of the appellee banks, it is insisted that the
transactions between them and bankrupts were in the nature of
sales, and by marking and shipping the cotton before bankruptcy, it
was appropriated to the contracts; that bankrupts had no purpose to
give a preference, and certainly the banks had no reasonable cause
to believe they were receiving an intended preference.
The trial judge, relying upon
The Idaho, 93 U. S.
575, held the cotton was appropriated before bankruptcy
to prior contracts between the parties. He further said:
"I am not convinced that Steele, Miller & Company intended a
preference, as it seems to me they uniformly discounted drafts
purporting to be secured by bills of lading for cotton, which were
in reality forged, and thereafter shipped the cotton to prevent
discovery of their dishonest methods, and that their transactions
with the bank were in the usual course of business and without any
intention on their part other than to conceal their true methods.
Furthermore, while the facts on which they might be charged with
notice ought to have excited the suspicion of the bank, I am not
prepared to say that they had knowledge, constructive or actual, of
Steele, Miller & Company's insolvency, or that a preference was
intended."
The bill was accordingly dismissed, and the circuit court of
appeals affirmed this action upon authority of
Lovell v. Newman
& Son, 192 F. 753, and
Hentz & Co. v. Lovell,
192 F. 762.
Admitting that title to the cotton in question passed, the
trustee now seeks annulment of the consummated transfer because a
preference would result therefrom. In
Lovell v. Newman &
Son, supra, recovery was asked upon the theory that the title
had remained in the bankrupts. By the statute's very words, in
order to set aside such a
Page 238 U. S. 98
transfer and recover the property, it must appear that
"the person receiving it, or to benefited thereby, or his agent
acting therein, shall have had reasonable cause to believe that it
was intended thereby to give a preference."
Whether such "reasonable cause to believe" existed is a question
of fact, and the burden of proof is upon the trustee.
Coder v.
Arts, 213 U. S. 223,
213 U. S. 240;
Wright v. Sampter, 152 Fed. 196, 198;
McNaboe v.
Columbian Mfg. Co., 153 F. 967, 968;
Tumlin v. Bryan,
165 F. 166-168;
Reber v. Shulman, 183 F. 564, 565;
Kimmerle v. Farr, 189 F. 295, 299-300;
Mayes v.
Palmer, 208 F. 97, 98, 101.
Considering the whole record, we are unable to conclude that
appellee banks had reasonable cause to believe that, by
transferring the genuine bills of lading to them, a preference was
intended or given, and accordingly, without undertaking to decide
other interesting questions raised, we must affirm the decree of
the court below. Prior to May 8, 1910, the banks thought the forged
bills in their keeping represented cotton actually moving from
designated points of shipment. They were unaware of the bankrupts'
crimes, and in the circumstances we cannot say they either believed
or ought to have believed that they were receiving anything more
than new receipts for their own property, physical possession of
which had passed during transit from a responsible railroad to a
trustworthy steamship company.
Affirmed.
*
"SEC. 60a. A person shall be deemed to have given a preference
if, being insolvent, he has, within four months before the filing
of the petition, or after the filing of the petition and before the
adjudication, procured or suffered a judgment to be entered against
himself in favor of any person, or made a transfer of any of his
property, and the effect of the enforcement of such judgment or
transfer will be to enable any one of his creditors to obtain a
greater percentage of his debt than any other of such creditors of
the same class. Where the preference consists in a transfer, such
period of four months shall not expire until four months after the
date of the recording or registering of the transfer, if by law
such recording or registering is required."
"SEC. 60b. If a bankrupt shall have given a preference, and the
person receiving it, or to be benefited thereby, or his agent
acting therein, shall have had reasonable cause to believe that it
was intended thereby to give a preference, it shall be voidable by
the trustee, and he may recover the property or its value from such
person. And, for the purpose of such recovery, any court of
bankruptcy, as hereinbefore defined, and any state court which
would have had jurisdiction if bankruptcy had not intervened, shall
have concurrent jurisdiction."