
    (First Circuit — Hamilton Co., O., Circuit Court
    Jan. Term, 1900)
    Before Smith, Swing and Gillen, JJ.
    BENEDICT and MINER, Trustees, v. THE MARKET NATIONAL BANK.
    
      Judgment note by corporation executed in contemplation of possible insolvency to operate as preference of creditor — Effect of judgment and levy—
    Wh.efe a cognovit note was executed by a corporation in embarrassed circumstances, for an antecedent debt, with the understanding that if the corporation should find itself compelled to make an assignment, the creditor would be N notified thereof in advance to be able to obtain judgment on the note and.levy of execution thereon before the assignment is executed by the corporation, which arrangement was carried out, in such case the judgment and levy being obtained after the corporation had ceased to prosecute the objects of its creation, constitutes such a preference of a creditor as under the authority of the Rouse case, 46 Ohio St., 493, is invalild.
    Appeal from the Court of Common Pleas of Hamilton ■county. -
   Swing, J.

The action was brought by Benedict and Miner, as trustees of the Miner & Moore Furniture'Company, a corporation under the laws of Ohio, which had heretofore made an assignment for the benefit of creditors, to set aside a judgment and levy obtained by the Market National Bank against said Miner & Moore Company just previous to the assignment of said company.

The material facts in brief are: That on the morning of June 9, 1896, the bank obtained a judgment against the furniture company on a cognovit note for the sum of $9,090; that immediately upon the rendition of the judgment, execution was issued and the sheriff immediately levied upon all the property of said company. That as soon as the levy was made by the sheriff, said furniture company placed on file in the insolvency court of said county its deed of assignment. On the following day, by an agreement entered into between the sheriff and the assignee, all the property was turned over to the assignee for the purpose of permitting the said assignee to sell said property, the proceeds of said sale to be liable to be applied to the payment of the execution. That the evidence clearly shows that the amount of said note was made up of two items — one of $8,500, which was borrowed by said company from said bank, and the other of $5,500, which was borrowed by Miner, a stockholder, to purchase the stock of another stockholder; and that as far as the furniture company was concerned, it was simply an indorser, which fact was known to the bank at the time, and in fact said endorsement was made by the company at the request of the bank. That it clearly appears that at the time of the giving of the note of $9,000, on which the judgment was taken, the company was very much in need of money, and $1,500 was loaned to it by the bank at the time, which sum was a part of the $9,000 note, but it was hoped that this amount of money would enable the company to pull through, for it was believed by the officers of the company that the company was solvent, although, at the time it was in distress. At the time of the giving of the note the bank was made aware of the condition of the company, and it was then agreed, as part of the consideration of the loaning of said additional $1,500 and the giving of said cognovit note, that if the company should at any time find out that they could not continue business and would be forced to make an assignment, that the company would inform the bank.in time for the bank to get judgment on the note and have execution levied before the assignment should be made. Acting in accordance with this agreement, the company did inform- the bank on the day before it made the assignment that they could not continue business any longer, and that it would, on the following day, make an assignment, and for the bank to proceed to get its-judgment. The company did nothing towards completing the assignment until informed that the levy had been made on said judgment, and then immediately made the assignment to one who was agreed upon by the bank and the company as the person to whom the assignment was to be made' at the time the $9,000 cognovit note was made if an assignment became necessary.

Upon this state of facts, should his judgment and levy stand? The supreme court of Ohio, in the cpse of Rouse trustee, v. the Merchants’ National Bank, 46 Ohio St,, 493, held that “a corporation for profit, organized under the laws of this state, after it has become insolvent and ceased to prosecute the objects for which it was created, can not, by giving some of its creditors mortgages on the corporate property to secure antecedent debts without other consideration, create valid preferences in their behalf over the other creditors, or over a general assignment thereafter made for the benefit of creditors. ” This holding is not in accordance with the decisions of many of the supreme courts of other states or of the supreme court of the United States, but it is in accordance with natural justice, and is the law of this state, Preferences created in any other way than by mortgages must be, for the same reason, invalid.

Was a preference created by the giving of this cognovit note and reducing it to judgment and levying upon the' property at a time when the corporation was insolvent and had ceased to prosecute the objects for which it was created?

At the time the note was given the company had not ceased to prosecute the objects for which it was created, nor was it believed by its officers or the bank to be insolvent; but it was very considerably involved and much in need of money, and it was feared and contemplated by both the officers and the bank that it might become insolvent and be forced to make an assignment and wind up its business, and with this in view it was agreed between said officers that when the time came the bank should be notified in time to procure a judgment a,nd levy on the property of the corporation, so that the claim of the bank should become a preference, and be secured. This agreement made between the bank and the company was afterwards carried out in perfect good faith by the company; and the bank did secure a preference by its judgment and levy on the property of the corporation at a time when the corporation was insolvent and had ceased to prosecute the objects for which it was created. If after the company had become insolvent and had ceased to prosecute its business, and had concluded to make an assignment, it had given a cognovit note for an antecedent debt, and informed the bank of its condition and intention, and had waited until the bank had prosecuted judgment and a levy on ail the property of the company before filing its deed of assignment, an invalid preference would have been credited. This would have brought it directly within the holding of the “Rouse case.” A preference would have been created, the only difference being in the means by which it was done — in this case by a cognovit note, and in that by a mortgage. There could be no reason why one should be invalid and the other not.

Does the fact that $1,500 was loaned to the company by the bank at the time of the giving of the note, and the further fact that at that time the company was believed to be solvent and it was hoped that an assignment might be averted, validate the proceedings?

In our judgment the giving of the note, and the promise to satisfy the bank in the event that an assignment should be determined upon in time to get a preference, and the giving of this notice and the procurement of the preference by reason of the judgment and levy, constituted one transaction, and that it should be considered as of the time when the judgment was taken and the levy made. The fact that at the time of the giving of the note the promise waB made to notify the bank, in the case of insolvency, in time for the bank to reduce its note to judgment and procure a preference by means of a levy,is what connects the transactions and makes them one. In our judgment,this was an invalid preference, and comes directly within the ruling of our supreme court in the“Rouse case. ” At case directly in point is to be found in the 126 Ill., 585.

Edward Barton, for Plaintiffs.

Kramer & Kramer, and Gray & Tisohbein, for the Bank,

Bat it is argued that the court of common pleas had no jurisdiction to set aside said judgment; that an assignment having been made, the court of insolvency became vested with exclusive jurisdiction to determine ail questions arising out of said assignment; but we do not consider this contention well taken, for if this judgment and levy was valid as far as this property was concerned, nothing was assigned, or at the farthest, only what was left after the satisfaction of said judgment. It is said in 56 Ohio St. ,-in the case of Ryan v. Root & McBride, 308: “The levy made on the Fischel execution having covered the entire property seized before the assignment was made, nothing was left for the assignment to fasten upon.” The only court competent to pass upon the validity of the judgment of the court of common pleas must be a court of general equity jurisdiction. The court of insolvency could not do this.

In our opinion therefore the judgment of the court of common pleas and the levy made hereon should be set aside and held for naught, on the ground that it was an invalid preference.  