
    Samuel Marshall Evans, as Trustee in Bankruptcy of the Estate of J. Samuel Jacobs, Bankrupt, Plaintiff, v. The National Broadway Bank, Defendant.
    (Supreme Court, New York Special Term,
    September, 1905.)
    Bankruptcy — Validity of transfers by bankrupt — Sufficiency of evidence in action to set aside transfers.
    Where a person opened an account with a bank for the purpose of obtaining discounts and the bank discounted paper for him to the amount of $20,000, on the strength of his statement showing financial responsibility and assets to the amount of $63,000, and renewed the paper from time to time; and where, during a period of nine months, in the course of which the bank received from time to time reports and information prejudicial to the credit and providence of the customer and found that he did not keep promises of payments from the proceeds of his property, he had reduced his indebtedness to $13,000, and, at the end of that time, declared that he could not pay any part of the remainder of the debt; and where, a few days later, the bank, then without security, after the customer’s default, made an arrangement with him', by which he was placed at the mercy of the bank which bound itself to nothing and, in pursuance of which, he subsequently made eleven successive
    
      assignments of accounts between April 12 and May 21, aggregating $47,920.34, and covering claims for all his shipments as soon as made and all his uncollected accounts previously accrued; and where the bank made collections and passed the proceeds to a separate account out of which, without any agreement or obligation under the terms of the arrangement so to do, it paid his checks aggregating $19,750 drawn on his personal account, in which there was no money, until May 19, when its refusal to pay a note precipitated a crisis; and where, after he had, upon the suggestion of the bank, turned over his business to a third party and the bank had refused to reassign the claims it held to provide working capital therefor, a petition in involuntary bankruptcy was filed, June 4, and, after adjudication,, the trustee in bankruptcy brought this suit to set aside the assignments to the bank on the ground that they were made to hinder, delay and defraud creditors, or, to recover the proceeds of its collections on the ground the bank had acquired an unlawful preference; and where, after the petition was filed, the bank had continued to collect the assigned accounts and, after paying itself, had turned over the balance to the trustee in bankruptcy; and where the customer’s financial condition seems to have grown steadily worse during the time the assignments were being made until his liabilities became $12,000 more than his assets, though, when the arrangement for the assignments was made they were only $8,000 more: a claim that the customer’s insolvency was not established, because the good-will of his business was not taken into account, will not be regarded; for no good-will could have been left in the business under the conditions shown where, in one year, assets of $63,000 resulted in a deficiency of $8,000; and because good-will is not to be estimated upon what the business might have been under different management, but upon what it was under the management and conditions that actually existed; and the debtor’s insolvency, as well as the bank’s knowledge of the debtor’s condition, clearly appearing from its own course of conduct and that of the debtor, as well as from many circumstances pointing to that conclusion, and the transfers having been made within four months, the plaintiff is entitled to recover so much of the bank’s collections as it had applied to the payment of the indebtedness due it at the time the arrangement with its customer was made, but is not entitled to recover the remainder of the fund which had been applied toward the payment of the customer’s liabilities to third parties.
    Action by a trustee in bankruptcy to recover moneys collected by the defendant on accounts assigned to it by the bankrupt within four months prior to the adjudication.
    
      ■ Frederick E. Kessinger (Herbert R. Limburger, of counsel), for plaintiff.
    Sullivan <fc Cromwell (William V. Rowe and Waddill Catchings, of counsel), for defendant.
   Leventritt, J.

In the month of February, 1901, J. Samuel Jacobs, who had theretofore been a partner of one McCafferty in the paint business, started in the same line on his own behalf. They soon became involved in litigation respecting the ownership of a trademark which was deemed to be of considerable value. In April, 1901, Jacobs opened an account in the defendant bank and, in order to obtain discount accommodations, he submitted a statement of his financial condition wherein he claimed that he was worth over all his liabilities the sum of $63,800, including an equity of $10,000 in real estate. On the strength of that statement the defendant discounted his note at four months in the sum of $10,000, due August 25 1901. Prior to its maturity and on July 3, 1901, the bank discounted for Jacobs another four months’ note for $10,000. This latter note became due October 3, 1901. Both notes were unendorsed and wholly unsecured. When the first note matured it was renewed in full for two months, the renewal note maturing October twenty-sixth. On October third, when the second note fell due, it was reduced by the payment of $4,000 on account' and for the remaining $6,000 a-new note, due January 3, 1902, was given to the defendant. Jacobs defaulted in the payment of the first renewal note which became due October twenty-sixth, but three days later he paid $1,000 on account and gave the defendant a renewal note, due December thirtieth for the remaining $9,000. Upon Jacobs’ default and in the end of October, 1901, a mercantile agency rendered to the defendant a report of Jacobs’ financial condition containing, among others, these statements:

Jacobs, J. Samnels,
“ Mfg. White Lead & Paints,
“ Brooklyn, N. Y.
The old firm manufactured a brand of white lead known as Gold Seal,’ and also controlled several trade marks, which both are now using. Jacobs claimed the exclusive right to. the trade mark Q-old Seal ’ and brought an action against McCafierty to restrain him from using it, but the case was decided in McCafferty’s favor. There is the strongest kind of competition between them and prices are cut on both sides. It is thought likely that there will also be further litigation. Jacobs has all along had the reputation of being a liberal spender and authorities believe that he is the least able to stand the strain. It is said that he has now got prices down to a point where there is nothing in the business. His payments locally are somewhat tardy and the general tendency is to watch the account closely.
“ An out of town authority to whom he owes about $1,500 dollars considerably past due, is unable' to collect and talks of beginning suit.
" September 26th. 1901.”
' “From out of town sources we learn that he is still owing a balance of about $1,500 on machinery and other over due accounts of about $2,000. In some cases, however, he pays promptly for indispensable current requirements. His indebtedness is believed fully $10,000.
" Oct. 31, 1901.”

A few weeks later the defendant received a further report from the same source and Jacobs was therein referred to in this language:

“ It is said that he has now got prices down to a point where there is nothing in the business. His payments locally have become so tardy that some of the conservative dealers no longer solicit his trade and we are unable to attain any definite estimate as to his financial worth.”

Thereupon the defendant pressed Jacobs to reduce his $15,000 indebtedness and he promised to apply the proceeds of his real estate then in process of condemnation to the reduction of the debt.

No payment was made on the $9,000 note which fell due on December 30, 1901, but a renewal note of like amount maturing March 3, 1902, was submitted. $1,000 was paid on January 3, 1902, on account of the $6,000 note then maturing and the balance of $5,000 was renewed until April 3, 1902. $1,000 was paid on March 3, 1902, on account of the $9,000 note then maturing and the balance of $8,000 was renewed until May 3, 1902.

In February, 1902, Jacobs realized $6,750 for his real estate interests but instead of devoting any part of it to the reduction of his indebtedness to the defendant, as he had promised, he turned it into the business, which thereupon comprised his entire property.

In March, 1902, the defendant learned that Jacobs was living extravagantly or beyond his means. The fact is that he was drawing from the business for personal expenses about $15,000 a year.

On April 3, 1902, when the $5,000 note matured, Jacobs informed the defendant that he was unable to pay any part of it, whereupon he was required to give in substitution a new note having but six days to run and its acceptance by the defendant was coupled with the warning that it must be paid when due. It was nevertheless protested for nonpayment, Jacobs having failed even to appear at the bank until sent for on the following day. Then followed the arrangement which has given rise to the present litigation. Up to that time the defendant had neither endorsement nor collateral of any kind to cover its claims. It was then agreed that Jacobs should assign outstanding accounts to the defendant, in which event the defendant would at its option from the collections thereof make further advances or loans to Jacobs so as to enable him to prosecute his business. Pursuant to that arrangement Jacobs assigned to the defendant on April 12, 1902, certain of his outstanding accounts, amounting to $7,100, and thereafter and until May 21, 1902, he continued to do so, making in all eleven different assignments, aggregating $47,920.34 and covering claims not only for all shipments as soon as made but also all his uncollected accounts which had accrued prior to April 12, 1902. This state of facts is shown on the face of the lists attached to the assignments. The defendant gave to Jacobs written authority as its agent to collect for its account all the assigned claims and it opened wrhat it termed his collateral ” account, devoted to entries of the collections which he made and turned over to it, as distinguished from his “ personal ” account. Although at no time during the period that Jacobs was making these assignments to the defendant had he any balance to his credit in his personal or deposit account, he drew checks on the defendant relying upon it to honor them though he had no agreement or assurance upon which to base such reliance. To the extent of $19,750, the defendant paid these checks and certain maturing notes held by creditors of Jacobs, and from time to time of its own volition transferred from the collateral to the personal account sums just sufficient to meet the payment of these checks and notes. That course was pursued by the defendant until May 19, 1902, when it refused to pay a promissory note then maturing, payable at the defendant bank, held by one of Jacobs’ merchandise creditors and duly, issued by him in the conduct of his business. This refusal brought matters to a crisis.

The creditor who held the dishonored note called upon the president of the defendant bank and he then advised, as he had previously suggested, that Jacobs should be induced to turn over the management of the business to one Aquilla Rich, who had had long continued experience and who had been in the employment of Jacobs from the beginning and the president maintained that unless such a change was made the result would be disastrous to all parties interested. The creditors thereupon persuaded Jacobs to adopt the suggestion and having accomplished this requested the defendant to co-operate with them by reassigning and surrendering claims so as to provide the business with the funds necessary to its further prosecution. Upon its refusal, they, on June 4,1902, filed a petition in involuntary bankruptcy; Jacobs was thereafter duly adjudicated a bankrupt and the plaintiff was elected trustee. In that capacity he brings this action to set aside the transfer of the accounts, claiming that the effect thereof was to hinder, delay and defraud the cred-11 itors of Jacobs or, failing in that, to recover the amount of such claims as the defendant collected on the ground that it thereby acquired an unlawful preference.

The defendant continued after the bankruptcy proceedings to make collections of the assigned claims and having realized therefrom a sum sufficient to cover the unpaid notes held by it aggregating $13,000 together with the expenses of collection, turned over to the plaintiff as trustee in bankruptcy the remaining uncollected claims aggregating $12,-478.65 and an overplus of $598.21 in cash.

Of the reassigned claims the plaintiff has collected only $1,849.47, the balance of $10,629.18 being worthless and uncollectible. Upon a public sale on the 12th of July, 1902, the stock, machinery and other tangible property of Jacobs realized $5,700. For all the assets which Jacobs owned on the 17th day of July, 1902, the sum of $10,063.55 was realized, and the debts owing by Jacobs on that day as proved and allowed in bankruptcy aggregated $31,879.34 — thus showing Jacobs’ insolvency in excess of $21,000 and affording, after payment of expenses, no more than a possible twenty-five per cent, dividend to his creditors on their respective claims.

On April 10,1902, when Jacobs and the defendant entered into the arrangement for the assignment of accounts, there was an excess of liabilities over assets by about $8,000, and from that time to Hay 21, 1902, the period covered by the making of the assignments, that excess gradually increased until on the last mentioned date the excess had mounted to nearly $12,000, although the sales made in the interim aggregated over $21,000.

Notwithstanding this clear exhibition of insolvency the defendant insists that Jacobs was not insolvent for the reason that the computation upon which that result is reached excludes the value of the good will of the business.

That good will is an addable asset in figuring solvency or insolvency is sound law. Chicago Title & Trust Company v. John A. Roebling’s Sons Co., 107 Fed. Rep. 71. The difficulty, however, is that I fail to find any good will left in this, business either at the date when the first assignment of accounts was made or at any time thereafter.

A business which in one year converted a surplus of $63,-000 into a deficiency of $8,000 can hardly lay claim to substantial good will. No attempt is made to reconcile this disastrous showing with the claim of a continued good-will except by pointing to the extravagant drafts of Jacobs. But even at the maximum amount of $15,000 a year, the major part of the decline still remains to be accounted for. Rich’s estimate that the business was a good, active, paying one hardly seems borne out by the figures and would argue rather what the business might become under efficient management than what it was in fact. But what a business might be is not an element that we may consider in estimating the value of good-will. Q-ood-will is something that has been created; not something which must yet be brought into being. There was some attempt on the part of the president of the defendant’to value the good-will as an expert but the testimony is wholly unsatisfactory. Waiving the lack of qualification to testify as to this particular business, the valuation is guess work and rests really on Rich’s estimate which the rapid destruction of assets renders faulty as a foundation.

The mere fact of the necessity of making such an arrangement as Jacobs made with the defendant does not argue a prosperous condition at the time of the assignments, while the period following, the transactions of which are more directly before the Court, shows a further loss. With the business conducted substantially as theretofore, with no knowledge by the creditors of the assignments, with the management in the same hands, with sales of $21,000 taking place in what are conceded to be among the best months of the year, the net result of the forty days’ activity is a loss of about $4,000.

Without going into further details I think the conclusion is clear that there was no good-will to this particular business and that it was insolvent within the meaning of the Bankruptcy Act throughout the period of the assignments.

The debtor thus having been insolvent and the transfers having been concededly made within the four months’ period, there remains to be considered the knowledge of the bank of the debtor’s condition and whether it had reasonable cause to believe that the debtor intended to give it the preference which it in fact secured. Benedict v. Deshel, 177 N. Y. 1.

The record does not leave it open to serious dispute that Jacobs assigned his entire outstandings and that the bank required and knew of this wholesale transfer. It is unnecessary to cite the many corroborative items in the evidence as the assignments on their face show that all the accounts, past and present, were set over. It is further clear that there was no definite arrangement or agreement' to what extent, if any, Jacobs was to receive financial assistance or facilities to meet current or accruing obligations.

While the discount by a bank of a depositor’s note secured by assigned accounts as collateral is an ordinary incident- of dealings between banks and their customers it is entirely unusual, as admitted by the defendant’s officers, to have such •a vague understanding as obtained in this case where, in consideration of a depositor placing himself absolutely at the mercy of the bank, it in return does not bind itself to do anything at all. The indefiniteness of the arrangement is emphasized by the bank’s sudden withdrawal of its support, arbitrarily and without notice, when the note maturing May nineteenth was refused payment. This indefinite arrangement, viewed in the light of the assignment of all the accounts and made after the bank was reasonably put upon inquiry by the warnings contained in the facts of the agency report, is alone almost sufficient to establish reasonable cause for the bank to believe Jacobs insolvent and that the assignments were intended to grant it a preference. There are, however, other significant items of evidence — not to mention the admissions made by the defendant’s officers in the bankruptcy proceedings. The sudden demand for collateral when none had been required during the period when the indebtedness was being reduced from $20,000 to $13,000; the knowledge that Jacobs was living improvidently; that he had failed to redeem his promise to apply the proceeds of his real estate towards reducing the bank’s claim but had instead put the money in his business, a fact that was known to the bank more than a month before the first assignment; his unbusinesslike dealings with the bank pointedly evidenced by his indifference to the maturity of his notes; the efforts made by the bank to have Jacobs consent to the appointment of a trustee justifying the inference that it had knowledge of the mismanagement of the business coupled with the bank officers’ declaration that unless a trusteeship were resorted to it would be disastrous to all parties interested; and, finally, the remarkable situation created by the bank by which Jacobs was forced to the necessity of drawing checks on a personal account that had no funds in it except such as the bank chose by the fiction of book-keeping entries to place therein. The bank officials must have known that a merchant who would submit to such a necessity had all other sources of supply cut off; was not only in great financial distress but absolutely insolvent. Wbile many of the facts recited, as well as others that might be gleaned from the record, can, separately considered, be reconciled with a condition of solvency, yet when all are marshalled and considered in their relation to each other, there is in my mind, at least, no escape from the conclusion that Jacobs was insolvent and that the defendant had reasonable cause to believe him so and to believe that his transfers were intended as a preference.

The plaintiff insists that this conclusion warrants a recovery on his part of the total of all the accounts that were at any time collected by the defendant and amounting to $35,029.26. This claim goes too far.

There was present consideration in honoring the Jacobs checks and notes for all but $13,000, omitting the cost of collection and the small surplus paid over to the plaintiff. The assignment of those accounts, the proceeds of which were applied to the discharge of Jacobs’ debts to third parties, did not constitute a preference under the Bankruptcy Law. Tiffany v. Boatman’s Institution, 18 Wall. 375; Matter of Cobb, 96 Fed. Rep. 821.

The plaintiff’s attempt to recover the amount collected by the bank on the theory that the whole transaction was void under the State law as had with an intent to hinder, delay and defraud creditors fails for insufficient proof.

Let there be judgment for the plaintiff to the extent indicated.

Judgment for plaintiff.  