Clark v. Iselin, 88 U.S. 360 (1874)
U.S. Supreme CourtClark v. Iselin, 88 U.S. 21 Wall. 360 360 (1874)
Clark v. Iselin
88 U.S. (21 Wall.) 360
1. When a person, borrowing money of another, pledges with that other a large number of bills receivable as collateral security for the loan (many of them overdue), the pledgee may properly hand them back to the debtor pledging them for the purpose of being collected or to be replaced by others. All money so collected is money collected by the debtor in a fiduciary capacity for the pledgee. And if a portion of the collaterals are subsequently replaced by others, the debtor's estate being left unimpaired, and the transaction be conducted without any purpose to delay or defraud the pledgeor's creditors, or to give a preference to anyone, the fact that proceedings in bankruptcy were instituted in a month afterwards and the pledgeor was declared a bankrupt will not avoid the transaction.
2. The giving, by a debtor, for a consideration of equal value passing at the time, of a warrant of attorney to confess judgment or of that which, under the code of New York, is the equivalent of such warrant, and there called a "confession of judgment," is not an act of bankruptcy, though such warrant or "confession" be not entered of record, but on the contrary be kept as such things often or ordinarily are in the creditor's own custody, and with their existence unknown to others. The creditor may enter judgment of record on them when he pleases (even upon insolvency apparent) and issue execution and sell. Such his action is all valid and not in fraud of the Bankrupt Law unless he be assisted by the debtor.
3. A creditor, having by execution obtained a valid lien on his debtor's stock of goods of an amount in value greater than the amount of the execution, may, up to the proceedings in bankruptcy, without violating any provision of the Bankrupt Act, receive from the debtor bills receivable and accounts due him, and a small sum of cash, to the amount of the execution, the execution being thereupon released and the judgment declared satisfied.
Clark, assignee in bankruptcy of Dibblee & Co., filed a bill in the district court of the district just named against Iselin & Co. to recover certain assets which the bill charged were made over to them in fraud of the Bankrupt Law, an act whose thirty-fifth section is in these words:
"If any person, being insolvent, or in contemplation of insolvency, within four months before the filing of the petition by or against him, with a view to give a preference to any creditor or person having a claim against him or who is under any liability for him, procures any part of his property to be attached, sequestered, or seized on execution, or makes any payment, pledge, assignment, transfer, or conveyance of any part of his property, either directly or indirectly, absolutely or conditionally, the person receiving such payment, pledge or assignment, transfer or conveyance, or to be benefited thereby, or by such attachment, having reasonable cause to believe such person is insolvent, and that such attachment, payment, pledge, assignment, or conveyance is made in fraud of the provisions of this act, the same shall be void, and the assignee many recover the property or the value of it from the person so receiving or so to be benefited."
Upon the hearing a decree was made granting the relief asked for, in part, and in part refusing it, and on appeal to the circuit court, this decree of the district court was affirmed. Both parties now appealed to this Court.
The firm of Dibblee & Co., jobbers, was formed in January, 1866, continued in business till May, 1869, and on the petition of creditors, filed May 3, 1869, was adjudged bankrupt June 2, 1869.
The defendants, Iselin & Co., were bankers doing business in the City of New York, and as such had various dealings with the firm of Dibblee & Co., who from time to time required commercial facilities, advancing to them money on the pledge of bills receivable, which Dibblee & Co. had received in the course of their business.
On the 6th of August, 1868, they borrowed from the defendants
$61,000, for which they gave their four notes, payable one in September, one in October, one in November, and the other in December of that year, and at the same time they transferred to the defendants, as collateral security for the loan, one hundred and forty-seven bills receivable by them, amounting in the aggregate to $72,170.42. Many of these bills were past due when they were pledged. On the day next following the loan, the notes held as collateral were returned to Dibblee & Co. for convenience of collection, to be collected for account of the defendants or to be replaced by others.
Of the four notes discounted by Iselin & Co., on the 6th of August, 1868, the one which fell due in September was paid at maturity, and the collaterals pledged for it were surrendered. The other notes were not paid when they fell due, but were renewed from time to time and extended, and the collaterals held by them were in part replaced by others.
Thus, on the 4th day of December, 1868, the day when the bankrupts' last note matured, the amount of the collaterals pledged to the defendants was $63,240.61, and they were all, or nearly all, good. It did not appear that any of them were uncollectible. For some of these, others were substituted up to January 15, 1869, and on the 5th of April, 1869, the amount of collaterals pledged for the payment of the three notes given by the bankrupts was either $63,318.89 or $65,013.15. On that day, they were all withdrawn, and others, amounting to $62,027.34, were contemporaneously pledged in their stead.
This pledge was sustained by the decrees below, and the assignee appealed.
On the 8th of April, 1869, Dibblee & Co. paid to Iselin & Co. $7,944.88, being the principal and interest of certain loans made without security prior to the 30th of November, 1868. The evidence showed that Dibblee & Co. were paying their debts generally as they matured. This payment also was sustained by the decree, and the assignee appealed.
There were some other transactions which the assignee called in question, which were sustained and from which
the assignee appealed, but which need not be more particularly mentioned.
A transaction, however, which both courts set aside and over which there was much more doubt and argument everywhere than about the others which it sustained, was of this sort.
On the 25th of February, 1869, Dibblee & Co. gave a judgment note, in the form authorized by the New York Code, to secure $54,100 lent by the defendants to them. This sort of note had what is called "a confession of judgment" on it. The maker declares that he "confesses judgment in favor of A. B." for such a sum, and "authorizes judgment to be entered therefor" against him. It is the equivalent of the old "warrant of attorney." A portion of the sum of $54,000, mentioned in this note, had been advanced on the 21st of February, and a judgment bill then given; another portion on the 23d of February, for which a similar security was then given, and the remainder was advanced February 24. On the 25th of that month, the previous confessions of judgment were given up and destroyed, and one confession for the entire loan, $54,100, was taken as above mentioned. The advances for which this confession was taken were made in negotiable state and railroad bonds of a larger nominal value, but they were taken by Dibblee & Co. at their cash value at the time. They were made to enable the bankrupts to borrow money, and upon depositing the securities lent as collateral, they obtained $46,000 from three banks with which they did business.
The confession of judgment was held by the defendants without entry of record until April 30, 1869, when judgment was entered upon it in the supreme court, as the bill averred at the request of the defendants, and an execution was issued and levied upon the debtor's stock of goods considerably greater in value than the amount of the debt. On the next day (May 1), at the request of the debtors, they paid to the banks with which the bonds lent had been pledged the sums for which they were held, and took up the collaterals and notes. Thus, a payment was effected on the judgment of
the difference between the amount of the notes and the collaterals. Then Dibblee & Co. paid $1,900 in cash and transferred bills receivable and accounts owned by them, amounting to $47,839.52, in satisfaction of the balance of the judgment, and the levy was released.
The circuit court decided that the mere giving of the judgment note was legitimate, but held the subsequent transaction to be fraudulent as in conflict with the Bankrupt Act, and decreed that the assignee of the bankrupts should recover from the defendants the amount received by them from the securities transferred on the 1st of May, together with the $1,900 paid to them in cash, and the value of the securities redeemed by them from the banks, above the sums which they paid for the redemption. From this part of the decree Iselin & Co. appealed, asserting that the payment, and the transfer of securities made to them by Dibblee & Co. on the 1st of May was not a preference in fraud of the Bankrupt Act, or any preference at all.
We return now to the transactions previous to the one last mentioned (from which the defendants appealed), and state the testimony bearing upon them.
The complainant alleged that the notes discounted by the defendants for the bankrupts in August, 1868, were mere renewals, and renewals of notes previously unsecured. However, the testimony established that Iselin & Co. were fully covered with collaterals for these discounts, from the time that they originated, and that the moneys collected by Dibblee & Co., on the collaterals temporarily entrusted to them, were, until replaced, regarded as the specific property of Iselin & Co., and to be paid over by Dibblee & Co. to Iselin & Co.
The testimony further showed that Dibblee & Co. were making preparations for extending their business during the then approaching "season."
Two members of the firm were examined as witnesses.
One of them thus testified:
"Up to April 30, I never heard the solvency of our house questioned, nor had I any reason to suppose that it would suspend.
A week or ten days before that Mr. Dibblee had said to Mr. Bingley and myself, that we had a good prospect for the coming season. Up to the 30th day of April, 1869, I had no reason to suppose that the house was not perfectly solvent."
"Though I knew little of the financial condition of Dibblee & Co., on the 30th April, 1869, I was led to believe by Mr. Dibblee's acts and from the circumstance that a few days before he directed me to reengage certain salesmen for the approaching season, that we were on that day solvent. I did not, of my own knowledge, know of such solvency. Up to that time, however, I never heard it questioned."
Both of these witnesses were partners in the house of Dibblee & Co., and attended to the purchases and sales made by the house, and were therefore in intercourse with the parties who sold the house goods. It seemed, therefore, that they would have been the first to hear any question as to the credit of the house being doubted.
A witness of the complainant, who, as an expert, had examined their books lately, testified that Dibblee & Co. were insolvent on the 1st day of August, 1868, to the extent of at least $75,000, and to a like amount for months previous to that date. However, subsequently to that date, the defendants purchased in the market Dibblee & Co.'s notes to the amount of over $80,000, more than $47,000 being unsecured.
On the 13th of April, 1869, a firm in which one of the Iselins was a special partner sold goods to Dibblee & Co. upon credit for over $24,000, and the amount due them from Dibblee & Co., at the time of the adjudication in bankruptcy, and proved before the register, was $8,351, one of the largest debts proved.
As already said, the court below sustained all the transactions except the last. That one it held fraudulent.