
    Edmund Wright, as Trustee in Bankruptcy of W. C. Loftus & Company, Bankrupt, Respondent, v. Gansevoort Bank, Appellant, Impleaded with Thomas J. Loftus and W. C. Loftus & Company, Defendants.
    First Department,
    March 22, 1907.
    Bankruptcy — preference by insolvent corporation contrary to section • 48 of the Stock Corporation Law — secured creditor entitled to preference to amount of security released — not entitled to full payment - when recourse against surety still subsists.
    Although section 48 of the Stock Corporation Law prohibits a preference by an insolvent corporation without regard to the creditor’s intent or his knowledge as to the actual or imminent insolvency of the debtor, yet a creditor' holding security given in the regular course of business, and not in contemplation of insolvency, who releases the same, on payment in full is entitled to protection even though unsecured creditors get nothing.
    But a creditor is entitled to be paid in full only to the extent of the collateral held by him.
    
      Thus, when the creditor o£a corporation holds notes indorsed by the president of the corporation, and partially secured by mortgages executed on lands owned by the. president and.his wife, it will be protected on receiving payment by the corporation without knowledge of its insolvency, to the amount, of 'security surrendered, if it cannot be restored to its former position.
    "When mortgages partly on the lands of the president of the corporation and partly upon the land of his wife have been given as collateral security for the indebtedness of the corporation, said mortgages ás between the creditor .and the insolvent corporation are "the property of the latter, and in returning the security of the president on payment by the corporation the security is released to the latter.
    But as to so" much of the debt evidenced b'y the corporate notes as is merely secured by the indorsements of the .president Of the corporation, and his wife, the creditor is'not entitled to full payment by the insolvent corporation as against other creditors for no security has been surrendered, the' rule being that the creditor may still look to the indorsers. ■,
    Ingkaham and McLaughlin,-JJ.,. dissented, with memorandum.
    Appeal by -the defendant, tbe Gansevoort Bank, from a judgment of the Supreme Court in favor of tbe plaintiff, entered in the office of the clerk of the corinty of New York on the 20th- day of June, 1906, upon-the decision of the court, rendered after a trial at the .New York Special Term, setting aside as preferential and fraudulent a certain payment made by W. 0. Loftus & Company to .the appellant'. ' , ",
    
      Philip J. Britt, for the appellant.
    
      Abram I. Elkus, for the respondent.
   Scott, J.:

This action is brought by a trustee in bankruptcy óf a corporation known as W. 0. Loftus .& Company to recover from the Gansevoort Bank .the sum of $15,000 and interest alleged to- have been paid to that hank on the eve of the corporation’s bankruptcy in" violation of section 48 of the Stock Corporation Law (Laws of 1892, chap. .688, as ámd. by Laws of 1901, chap! 354).

The corporation of W. O. Loft ns & Company was engaged in the clothing business and'one Thomas J. Loftus was its president and-had full authority to sign checks and notes in its name and behalf.

, On February'S, 1903, Thomas J. Loftus borrowed' from defendant upon his own note indorsed, by his wife, the sum of $5,000, the bank knowing that it was a personal loan to him. Later this note was renewed by being merged with a series of notes made by the corporation. From time to time the corporation, for. business purposes, made and renewed other notes, all of which were signed by the corporation and indorsed ■ by Thomas J. Loftus and his wife. Finally on December 2, 1903, the defendant held three demand notes of the corporation, aggregating $15,000, upon which interest was due, these notes also being indorsed by Mr. and Mrs. Loftus.

On October 9, 1903, at a time when it does not appear that W. C. Loftus & Company was insolvent, the defendant had received from Thomas J. Loftus, the president of the company, as collateral security for the notes of W. C. Loftus & Company, a mortgage made by Thomas J. Loftus and Mary B. Loftus, his wife, for $5,000 and an assignment of a bond and mortgage for $6,000 made by one Bussell to Ellen Murtlia, the assistant and bookkeeper of Thomas J. Loftus. It was assumed' by the court below .and by counsel'on their briefs that with these mortgages and the indorsement of Mary B. Loftus and a guaranty by her the defendant’s loan was fully protected and secured. It further appeared that W. O. Loftus & Company kept a deposit account with defendant, in which had been kept a substantial balance until November 14, 1903, when the account became overdrawn by the sum of $513.59, in which condition it remained until December 2, 1903. ' On this latter date the corporation deposited with defendant a sum more than sufficient to make good the overdraft and to pay the amount due upon the notes. On the same day the corporation drew and gave to the defendant bank its check on said bank for $15,594.01, and received from the bank the notes and the collateral which had been given to secure them. On the same day the corporation drew checks in favor of three other creditors, thereby exhausting its deposit account with defendant. On the very next day a petition in bankruptcy was tiled, and in due course W. O. Loftus & Company was adjudged a bankrupt and plaintiff was appointed trustee. /

It appears that the payments made by the corporation on December second represented the proceeds of a sale of its merchandise ' stock and had practically exhausted its entire assets, leaving only about $200 to pay claims aggregating about $27,000, but this fact was not known to defendants.

The statute under which plaintiff claims (Stock Corp. Law, § 48), in

-sofar as it is applicable to this case, reads as íollowsá “lío conveyance, assignment or transfer of any property of any such corporation * * " nor any payment made, judgment suffered, lien created or security given- * * * when the corporation is insolvent, or its insolvency is imminent, with the intent of giving a preference to any particular .creditor over other creditors of the corporation, shall be valid * * *. Every person receiving by means of any such prohibited act or deed any property of the corporation shall be bound to account therefor to its creditors or stockholders or other trustees. * * * lío such conveyance, assignment or transfer shall be void in the hands of a purchaser for a valuable consideration ■ without notice.” ■ ■ .

The statute is drastic in the extreme, and applies when ¿ver a corporation is insolvent or its insolvency is imminent, if the payment or transfer is made witli intent on the part of the debtor to give a preference, without regard to the creditor’s intent or even his .knowledge as to the actual or imminent insolvency of the- debtor. (Munson v. Genesee Iron & Brass Works, 37 App. Div. 203.) The court below found that W. 0. Loft-us & Company was insolent on December 2, 1903, and the evidence fully sustains that finding. It also found that the payment of $15,594.01 to the defendant was preferential, and awarded plaintiff a judgment for that amount.

The serious question in the case is whether or not this finding is supported by the facts. In considering this question it is necessary to bear in mind the fact that the bank held ample security for the notes, and that it does not appear that the corporation ivas insolvent when the security was given, or that it was so given with a view to preferring the bank. In this -respect the case presented by the evidence differs widely from Hilton v. Ernst (38 App. Div. 94) and Salt v. Ensign (79 Hun, 107), much relied upon by the respondent. In Salt v. Ensign an insolvent corporation, in contemplation of insolvency, sold and delivered goods to a third pai;ty, upon the agreement that the price thereof should be paid to an unsecured creditor in satisfaction of his debt. In Hilton v. Ernst, the Kilmer Manufacturing Company, of which plaintiff was receiver, had assigned to defendants certain accounts as security for an indebtedness. One of these accounts bad been collected by the officer of the Kilmer Manufacturing Company and the proceeds converted. ' The Kilmer Manufacturing Company, on the verge of insolvency, assigned other accounts to take the place of the one which had been wrongfully collected ; it was this last assignment which was declared void, upon the rather narrow ground that the debt for which it was given was that arising out of the collection and conversion of the proceeds of the earlier security, and not the original debt for which the prior security had been given, and thus the case really turned on the point that security had been given in contemplation of insolvency for a debt not, therefore, secured. It was held in Dutcher v. Importers & Traders Nat. Bank (59 N. Y. 5), in a case arising under the Kevised Statutes, that, even in the case of a company known to its officers to be insolvent, a payment or sale made in the usual and ordinary course of business by the company, and one which would have been made in the same way if the company had'been prosperous and solvent, could not be said to have been made in contemplation of insolvency. In that case an insolvent bank had paid a check drawn upon it by a depositor. In Paulding v. Chrome Steel Co. (94 N. Y. 334) the validity of a chattel mortgage, given as security for a debt, was upheld although executed on the very eve of insolvency, because it was simply the carrying out of an agreement previously • made by the company to give such security, and was given in substitution of a prior mortgage which had. been proved to have been defectively executed. The particular point in all of the foregoing cases applicable to the present is that they recognize the superior right of a creditor holding security given in the regular course of business and not in contemplation of insolvency to hold his security and realize upon it after insolvency, even if he thereby is paid his debt in full, and the unsecured creditors get nothing.

The position of the defendant on and prior to December 2, 1903, was that it held ample security for its loan to the Loftus Company,' and had an absolute right to realize upon that security. We think that the act of Loftus & Company in depositing on December 2, 1903, the'cash received from the sale of its merchandise assets, and immediately checking out the amount to the defendant bank and a few other favored creditors, must be considered as a payment to the bank of the loan represented by the" notes. But to the extent that the bank then held collateral in the shape of the mortgages executed by Mr. and Mrs. Loftus and by Bussell, the bank was entitled to hold the securities until the debt was paid, even if thereby it received a larger proportion of its debts than othér creditors of the company were able to realize. When the company tendered payment of the notes the bank, having no knowledge of its insolvency, was justified in accepting the payment, and having done so was bound to return the collateral security as to which it had no further right or claim.

It was by such payment, up to the value of the mortgages, put in no better position than it had been before, but if now required to repay the money it will be in a much worse jiosition, for plaintiff does not offer, nor does .it appear that he is able, to restore this-security to the. bank. We attach no importance to the fact that one mortgage apparently covered property of Mrs. Loftus, and that the other seems to have been the individual property of Thomas J. Loftus. As between the bank and the insolvent company the mortgages were the property of' the company. They had been given to the bank by tlie president of the company as collateral for the company’s indebtedness. Thomas J. Loftus was both president and treasurer of the company, and, evidently, its active business manager. He had signed. the notes, and the check, as he had a right to do, in the name of the company, and in its behalf had deposited the collateral. In dealing with- him the bank was dealing with the company, and in returning the security to him it had returned it to the company.

In so far, therefore, as the check given to the bank on December 2-, 1903, represented the value of the two mortgages then held by the bank as collateral security, we do not consider that the payment can properly' be said to have been preferential. As to so much of the payment as exceeded the value of the two' mortgages a different question is presented. As to that the bank held no security except the indorsements of Mr. and Mrs. Loftus and the personal guaranty of Mrs. Loftus. So far as these are concerned the bank surrendered nothing and' will lose nothing if it is required to pay back the money to the receiver. The rule is that in cases where the creditor innocently receives payment from the principal debtor, which he is afterwards- required to repay because it constituted an unlawful preference, the debt will not, therefore, be considered as having been paid so as to release the surety, but the creditor may pursue, his remedy against the surety as if no payment had been made. (Swarts v. Fourth Nat. Bank, 117 Fed. Rep. 1, and cases therein cited.) Consequently the defendant bank, even if required to repay so much of the $15,591.01 as was secured only by the indorsements and guaranty of Mr. and Mrs. Loftus, will be put in no worse position than it would have been in if no payment had ever been made, but may still recover from the guarantors. Our conclusion is, therefore, that in so far as the debt to the bank was secured by the two mortgages above referred to, up to the value of these mortgages, the payment on December 2, 1903, was not preferential and void, but was received in good faith and for a valuable consideration, to wit, the surrender of collateral security to the benefit of which the bank cannot now be restored, but as to the sum paid to the bank, not secured by the mortgages, the payment must be considered as preferential and void, the bank having surrendered no security therefor which is not now as available to it as it was before the debt was paid.

It may be that in another action, upon proper proofs, the plaintiff can recover from defendant bank the $5,000 originally loaned to Thomas J. Loftus personally and afterwards merged into the indebtedness of W. C. Loftus & Company, but neither the allegations of the complaint nor the evidence would justify a recovery upon that ground in the present action.

The judgment should be reversed and a new trial granted, with costs to appellant to abide the event.

Pattbeson, P. J., and Clabke, J., concurred.

Ingraham, J. (concurring):

I concur in the result, but I do not concur in what is said by Mr. Justice Scott as to the right of the plaintiff to recover any portion of this payment made to the defendant, for the reasons stated in my dissenting opinion in the case of Perry v. Van Norden Trust Co. (118 App. Div. 288), decided herewith.

McLaughlin, J., concurred.

Judgment reversed, new trial ordered, costs to appellant to abide event. Order filed.  