
    George W. Crooks, as Trustee in Bankruptcy of the Estates of Howard E. King and of the Firm of H. E. King & Son, Bankrupts, Appellant, v. The People’s National Bank of Malone, N. Y., Respondent.
    
      Bankruptcy — what substitution of good paper for bad, by procuring the indm'sement of a third person to whom security is given by the bankrupt, constitutes a fraudulent preference.
    
    A transfer of property by an insolvent is obnoxious to the provisions of the National Bankruptcy Act only when the transfer is made with intent to create a preference and the person benefited thereby has reasonable cause to believe that a preference is intended.
    In an action by the trustee in bankruptcy of Howard E. King and of the firm of H. E. King & Son, of which firm Howard E. King was the senior member, to set aside transfers made by King to the defendant bank on the ground that such transfers created unlawful preferences, it appeared that H. E. King & Son had overdrawn its account with the defendant bank to the extent of about §2,600, and that the bank, as security for such overdraft, held certain bonds valued at about §2,000; that in part to pay such overdraft King procured his son to make a note to a third person who indorsed the same and deposited it in the bank to the credit of the firm; that the bank thereupon surrendered to the firm the collateral held by it; that King, in order to secure the maker' of the note against loss, assigned to such maker a bond and mortgage owned by him.
    
      Held, that the evidence was not sufficient to warrant a finding that the transfer of the mortgage to the maker of the note was made with the intent to create a preference for the benefit of the bank.
    It further appeared that the bank held unsecured drafts amounting to §12,000, drawn by H. E. King & Son upon one Searls, who was probably insolvent; that King, who was the president of the bank, "procured one Paddock, who was financially responsible, to indorse a demand note made by Searls for the amount of the drafts; that such note after being indorsed by H. E. King & Son was deposited in the bank and the drafts surrendered; that to secure Paddock from loss upon his indorsement King transferred to him securities valued at §10,000.
    
      The court found that, in the negotiations which led to the substitution of the note indorsed by Paddock for the drafts, one Marshall, the cashier of the bank, acted on behalf of the bank, and that neither he nor the bank had reasonable ground to believe that King was insolvent.
    
      Held, that King was acting in the transaction on behalf of the bank, and that the bank was chargeable with knowledge of his intent to give a preference to the bank.
    Parker, P. J., dissented.
    Appeal by the plaintiff, George W. Crooks, as trustee in bankruptcy of the estates of Howard E. King and of the firm of H. E. King & Son, bankrupts, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Franklin on the 13th day of April, 1901, upon' the decision of the court, rendered after a trial before the court without a jury, dismissing the complaint upon the merits.
    The action is brought to set aside certain transfers of personal property, made by Howard E. King to the defendant, or for its benefit, on the ground that such transfers created unlawful preferences under the Bankrupt Law. H. E. King & Son was a partnership, composed of Howard E. King and William H. King, his. son.. Of this partnership Howard E. King was the responsible member, and he was also at all times, until he went into bankruptcy upon the 16th day of February, 1899, the president of the defendant bank. On the 4th day of February, 1899, the firm had overdrawn its account in the said bank to the extent of about $2,600. In part to pay that overdraft, one John H. King, another son not in the partnership, made his note for $3,100 to H. D. Thompson, who indorsed1 the same and deposited it in the bank to the credit of the .firm. The bank thereupon surrendered to Howard E. King some water bonds, which it held as security for the firm’s overdraft, of the value of about $2,000. To secure John H. King for his note, made for the benefit of H. E, King & Son, Howard E. King assigned to him a bond and mortgage, which he held upon the house of W. H. King. This transfer is claimed to have been in fraud of the Bankruptcy Law in creating indirectly a benefit to the bank to the extent of the overdraft, which was paid by the note of John H. King. To recover from the. bank the benefit claimed to have been received, by reason of this transfer is the. second cause of. action alleged in the plaintiff’s complaint.
    
      H. E. King & Son had for a long time been dealing in hops. The purchase price of these hops was paid by moneys obtained from the defendant bank upon sixty-day drafts, drawn by H. E. King & Son upon one Searls, and by him accepted. There was no other security for the payment of these drafts than the liability of IT. E. King & Son and of Searls, who was probably insolvent. On the 14th day of February, 1899, two days before the insolvency, this overdraft amounted to a little upwards of $12,000. Upon that day a note was made by Searls for the amount of the drafts, which was by Howard E. King procured to be indorsed by one Paddock, who was financially responsible. That note, after its indorsement by H. E. King & Son, was deposited in the defendant bank, and the acceptances theretofore held by the bank were surrendered. To secure Paddock for his indorsement of that note Howard E. King transferred to him some bank stock and water stock, of the value of about $10,000. The plaintiff claims that this transfer was made in fact for the benefit of the defendant, and creates a fraudulent preference under the .Bankrupt Act, and to the extent of the value of this bank stock and water stock the defendant has received a benefit for which it should account to the plaintiff as trustee. This constitutes plaintiff’s first cause of action. The action was tried before the court without a jury and the complaint dismissed. From the judgment entered upon this decision this appeal is taken. Further facts appear in the opinion.
    
      John P. Badger, for the appellant.
    
      Ma/rtin JS. Mo Clary and John P. Mellas, for the respondent. '
   Smith, J.:

The transfer of property by an insolvent is obnoxious to the provisions of the Bankrupt Law, only when the transfer was made with an intention to create a preference, and the person benefited thereby has reasonable cause to believe that a preference xvas intended. (30 U. S. Stat. at Large, 562, § 60.) The fact that the overdraft of $2,600 was at the time substantially secured by the water stock of Howard E. King, which was held as collateral thereto, would give full warrant to the finding of the trial court that the transfer of the mortgage to John H. King was not made with the intent to create a preference for the benefit of the bank. It is true that the overdraft was. somewhat in excess of the security which the bank already held, but the excess was slight and the nature of the transaction was such that we think a finding to the effect that the mortgage was given with an intent to create a preference 'would be unsupported by the evidence. As to the second cause of action, therefore, we aré of opinion that the complaint was properly dismissed.

■ As to the first cause of action a more difficult problem is presented. These drafts drawn by H. E. King ■ & Son upon Searls, and by him accepted, amounting to upwards of $12,000, were not secured. They were confessedly, in part, worthless. In their place was substituted a note, made good by the indorsement of Paddock. That indorsement was obtained by the transfer from Howard E. King of these securities. This fact is of irresistible inference. Paddock was asked to indorse upon security given. At the time of the indorsement he asked about the security. Whatever statement he may have made as ‘to his willingness to indorse, with or without security, the indorsement was, in fact, made upon consideration of the transfer of these securities. Paddock’s' good faith is not questioned, nor his belief in the solvency of King. No attempt is made to take from him the securities. If. securities had been transferred directly to the bank to secure these acceptances, with an intent to create a preference, and the bank had reasonable ground to believe such was the intent, such transfer would be clearly obnoxious to the provisions of the Bankrupt Law. It is claimed, however, that instead of this direct method an indirect method' was adopted to accomplish the same result; to wit, a responsible indorser was furnished to whom the securities were transferred. The effect is to substitute good paper for bad, and, to the extent to which such substitution was obtained by the transfer of the bank stock and water stock, it is insisted that the preferred creditor should refund to the trustee the advantage obtained by this indirect preference- In this view of the case it becomes immaterial as to what right, the bank would have in security held by an indorser, and as to whether the bank would have any right thereto in case of the solvency of the indorser. It also seems to me immaterial whether Paddock had waived protest, or had been charged by protest, or even whether he had paid the note. If a preference can be thus indirectly given through the medium of an innocent indorser, who is secured, the limitations of the Bankrupt Law are practically without effect. That such a transfer is within the prohibition of the Bankrupt Law has been settled by this court by its decision upon review of an interlocutory judgment sustaining a demurrer to the plaintiff’s complaint. (See Crooks v. People's Nat. Bank, 46 App. Div. 335.)

The trial court held, however, that King’s knowledge was not, the knowledge of the bank. It was found as a fact that one Marshall, the cashier of the bank, acted in these negotiations for the bank, and that neither he nor the bank had reasonable ground to believe that King was insolvent. But the bank’s ignorance' of the preferential intent of King can only be sustained upon the holding that King’s knowledge was not the knowledge of the bank. If King’s knowledge is in law imputable to the bank then the plaintiff would seem to have established an intentional preference by King, and full knowledge of such intentional preference by the defendant, a party benefited thereby.

An agent owes a duty to his principal to disclose to him any information which he may have which may be relevant to that agency. The law conclusively presumes that the agent makes such disclosure, unless the agent has some private purpose to accomplish, the accomplishment of which would be imperiled thereby. No such purpose is here apparent. King was the chief officer of the bank. Upon insolvency his first thought would be to protect the institution of which he had so long been the head. He was asking no favor of the bank the granting of which would be imperiled by knowledge of his insolvency. This was his last unsecured debt which he was securing. He was substituting demand paper for his obligations, part of which were not yet due. Even if its probable effect was to give King further time, although demand paper was given, the greater advantage was to the bank, in which was substituted good paper for poor. Marshall was not alone acting for the bank. If acting for himself King was acting equally, if not in a greater degree, for the bank. The case is not one in which the agent was negotiating at arms’ length for his own advantage. Knowledge of Ms insolvency would only have made the bank the more willing to accept the substituted paper. It is true that a disclosure of his insolvency would render precarious the holding by the bank of the benefit intended to be given — no more so, however, than the disclosure by any agent of the insolvency of a third party who was endeavoring to prefer the principal. In the case of a third party the knowledge of the agent would be confessedly imputed to the principal. When the insolvency is that of the agent himself and there is no personal advantage to be gained by concealment no reason is apparent why the agent’s knowledge- is not in like manner imputable to the principal. And this- conclusion is, I think, in accord with authority.

Without considering in detail the cases cited by the learned trial judge, it may be said, generally, that in all those cases in which it was held that the knowledge of the agent was not imputable to the principal the agent was acting in his own interest, and against the interest of the principal—to secure some personal advantage to himself. These facts bring the cases within the recognized exceptions to the rule. In support of our conclusion the case most nearly akin is that of Nisbit v. Macon Bank & Trust Co. (12 Fed. Rep. 686). In that .case a firm in which was the president and cashier of a bank assigned to the bank, within less than four months of insolvency, some bank stock as security for indebtedness. It was held that the knowledge of the president and cashier of the insolvency of the firm was the knowledge of the bank and the assignee in bankruptcy could recover back. (See, also, Bank of United States v. Davis, 2 Hill, 45; Holden v. New York & Erie Bank, 72 N. Y. 29; First National Bank of Blaine v. Blake, 60 Fed. Rep. 18; Getman v. Second National Bank, 23 Hun, 498; Wilson v. Pauly, 12 Fed. Rep. 129, 135; Loring v. Brodie, 134 Mass. 454, 457.)

If thése views be correct the plaintiff is entitled to a reversal of the judgment.

Judgment dismissing complaint as to first cause of action therein stated reversed on law and fact and new trial thereof granted, with costs to appellant to abide event.

All concurred, except Parker, P. J.,. dissenting in opinion. '

Parker, P. J. (dissenting):

I cannot concur in the result which my brethren have reached in this case.

Briefly stated, the situation is as follows :

Howard E. King & Son had drawn drafts to the extent of some $12,000 upon one Searls, and had procured them to be discounted by the defending bank. Some of such drafts were past due and had gone to protest, others had not yet matured. Searls was supposed to be insolvent. Howard E. King was the president of such bank. The bank examiner criticised these drafts as “ single name paper,” and, owing to such criticism, the Comptroller of the Currency wrote to the bank on January 25, 1899, requiring that such paper be taken care of in some different manner. Mr.. Marshall, who was the vice-president and acting manager of- the bank, called Mr. King’s attention to that letter, and after some urging on Marshall’s part it was arranged as follows: Searls made a note for the whole amount of the drafts, dated February 14, 1899, payable on demand, to the order of one Paddock, who was entirely responsible. Paddock indorsed the same and waived demand, protest and notice thereof. Howard E. King & Son thereupon indorsed under Paddock, and with such note took up all of the drafts above referred to. Such note was procured from Searls by King, and he procured the indorsement of Paddock thereon and transferred to him, as security therefor, some $10,000 worth of bank and water stocks. Within two or three days thereafter the firm of Howard E. King & Son, and King himself, went into voluntary bankruptcy. It is found as a fact by the trial court that neither Marshall nor any' of the officers of the bank, save King himself, had any knowledge of King’s insolvency, nor any reasonable ground to believe that by taking up such drafts in the manner above stated he intended to prefer the bank over his other creditors. The trial court further found, as a fact, that neither King nor the said firm intended to prefer the bank when such note was so given.

Hpon this appeal the court holds that the knowledge which King must have had of his insolvency, and of the insolvency of his said firm, must be deemed the knowledge of the bank, and that his intent to prefer the bank follows irresistibly from the transaction above ’ stated; and so the judgment of the trial court dismissing the complaint is reversed.- It is in this conclusion that I am unable to concur.

I am of the opinion that the rule applicable to this question maybe stated as follows: Knowledge acquired by an officer of a bank casually, and not while acting in his official character for the bank, is not to be imputed to the bank. It is not a legal inference that such knowledge was communicated by him to the bank. This is illustrated in the fdllowing cases:' Mayor v. Tenth National Bank (111 N.Y. 446, 457); Casco National Bank v. Clark (139 id. 307, 313); Merchants' National Bank v. Clark (Id. 314).

But if such officer subsequently acts for the bank and the knowledge so acquired becomes material to the transaction in which he is so engaged, then such knowledge will be imputed to the bank if it is in his mind while so acting. As was said in Holden v. New York & Erie Bank (72 N. Y. 294): “ The knowledge of Granson -as an individual, or as an executor, was not imputable to the bank merely ieccmse he was its president, but because when it acted through him as president in any transaction where that knowledge was material and applicable, it acted through an agent who at that very time had a knowledge of facts which gave a character to the transaction, * * (See, also, Constant v. University of Rochester, 111 N. Y. 604, 610; Weisser v. Denison, 10 id. 68, 76; Fulton Bank v. New York & Sharon Canal Co., 4 Paige, 127; Seneca Country Bank v. Neass, 5 Den. 329.)

In Bank of United States v. Davis (2 Hill, 463) it is said: “ I agree that notice to a director, or knowledge derived by him while-hot engaged officially in the business of the bank, cannot and should not operate to the prejudice of the latter ; ” but, nevertheless, the bank was in that case held liable • because the director who had so acquired the knowledge subsequently acted officially in a matter which such knowledge affected, and, therefore, his knowledge was charged against the bank. All of these cases are recognized as authority in the recent case of Benedict v, Arnoux (154 N. Y. 715).

I do not know that this rule is disputed in the prevailing opinion, but it- is there.claimed that even if King was acting for himself, he “ was acting equally, if not in a greater degree, for the bank.”

It is true that his act worked an advantage to the bank. In that sense, he was aotingfor it. His part in the transaction' was favorable to, not against the bank; but that he in any sense represented the bank in that transaction I cannot discover. Two parties were acting—the bank on the one side, as a creditor, King on the other, as a debtor. Marshall represented the bank. He, on behalf of the bank, demanded of King that the requirement of the Comptroller,, that King change the drafts in question, be complied with. King, as the only responsible party on such drafts,, undertook to, and did, change them. He first procured his own debtor Searls to execute the note. Then he procured Paddock as an additional party to the paper and for his accommodation, to indorse it; and then, after indorsing it in his firm name, he delivered it to Marshall for the bank, and took up the paper which the bank then held against his firm. Every act of his is the act of a debtor. In not a single feature of the transaction does he appear as a bank officer, obtaining security from a debtor. He does not ask Paddock to indorse for the bank, nor for Searls, but for himself. He does not as an officer of the bank pass upon the form or sufficiency of the note. Marshall does that. He does not as president, for the bank, receive the note and deliver to himself the drafts in exchange therefor. As a debtor, he tenders the note to Marshall, and Marshall, on behalf of the bank, performs every act that the bank was called upon to perform in the matter. As a matter of fact, King did not, as an agent of the hcmk, take any part whatever in the transaction. Hence, although he was in fact its president, the knowledge of his own pecuniary affairs derived from matters purely personal to himself, and not from any information acquired while acting officially for the bank, cannot within the rule above stated be imputed to the bank.

It is urged that, because King was not engaged in an attempt to injure the bank for his own benefit it must be presumed that he gave to the bank all the knowledge that he had upon the subject of his own solvency.

The reason why an agent engaged in an attempt to defraud his principal is not, under any circumstances, presumed to have disclosed his knowledge to the principal is because such disclosure would defeat his purpose, and, therefore, may not reasonably be presumed, But if King’s purpose in this case was to unlawfully prefer the bank, his disclosure to it of his insolvency and of his unlawful intent would equally defeat his purpose. It would give knowledge to the bank that would render his effort at a preference unavailing. Therefore, there is the same presumption against his disclosure in this case as would exist if his purpose had been to advantage himself at the expense of the bank.

But, as above stated, no presumption arises that an agent discloses to his principal knowledge acquired casually and while not engaged in performing, the duties of his agency; and, therefore, although King may have for some time been aware that he was insolvent (a fact which is by no means clear) it. is not to be presumed that he had notified the' bank to that effect, nor would such knowledge be imputed to it until the fact of his. insolvency became material to some transaction in which King as its president and in . its behalf was representing the bank.

I concur with the trial court that when Marshall took the Paddock note and surrendered the drafts neither he nor the bank had any knowledge of King’s insolvency, or reason to apprehend it, and had no reasonable ground to suppose that it would operate as a preference to the bank over his other creditors; that the knowledge which King had of his purpose and of his financial condition was not imputable to the bank, and, therefore, it was entitled to hold the full value of the Paddock note as against all other creditors.

Judgment dismissing complaint as to first cause of action therein stated reversed on law and facts and new trial thereof granted, with .costs to appellant to abide event.  