
    John M. Perry, as Trustee of Samuel A. Skead, Bankrupt, Respondent, v. Charles Booth and Others, Composing the Firm of Booth & Company, Appellants.
    
      Application of payments to the oldest items — the inference inf amor of honesty applies as well to a, fraud, upon the law as to fraud, in fact.
    
    Where a payment is made upon general account, and no direction is given as to its application, the law applies it to the oldest items.
    The rule that where a transaction is capable of two inferences, one in favor of the integrity of the transaction and the other to the contrary, the former inference will prevail, is applicable in respect to fraud upon the law as well as to fraud in fact.
    Appeal by the defendants, Charles Booth and others, composing the firm of Booth & Company, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Kings on the 11th day of January, 1901, upon the decision of the court rendered after a trial at the Kings County Special Term, except from so much thereof as adjudges that the transfer of lumber by Samuel A. Skead on November 16,1898, was made in good faith, and that the defendants thereafter advanced thereon money aggregating more than the value of such lumber.
    
      R. Burnham Moffat and Charles Edwards Woodbridge, for the appellants.
    
      Everett V. Abbot [ William S. Maddox with him on the brief], for the respondent.
   Sewell, J.:

The complaint alleges that on the 13th day of December, 1898, Samuel A. Skead made a transfer to the defendants of certain property belonging to him, to wit, 1,400,000 feet of lumber of the kind and quality known as Para shippers, of the value of $20,000; that on the 15th day of February, 1899, a petition in bankruptcy was filed and Skead was adjudged a bankrupt; that at the time of the transfer the defendants were creditors of Skead; that the effect of the transfer was to enable the defendants to obtain a greater percentage of their debt than other creditors of the same class, and that the defendants had reasonable cause to believe that it was intended by the transfer to give such a preference.

For the determination of the question involved it will be well to consider the testimony in the chronological order of events.

In May, 1896, Booth & Co. entered into a contract to purchase from Skead 1,500,000 feet of lumber, to be delivered to them during the coming rubber crop season. In January, 1897, a similar contract for the purchase of 2,000,000 feet of lumber was entered into, to be delivered at such times and in such quantities as Booth & Co. might require between May 1, 1897, and May 1, 1898;" payments to be made as each lot of lumber was actually delivered and shipped on Booth & Co.’s steamers. While deliveries were being made under this contract, and on or about February 17, 1898, another agreement was entered into between the parties for the sale of 2,000,000 feet of lumber and an additional 1,000,000 feet at the option of the defendants, at $14.75 per thousand feet. The agreement provided that deliveries should be made by Skead alongside of Booth & Co.’s steamers .in Brooklyn as called for between June 1, 1898, and September 1, 1899, and that Booth & Co. should pay for each lot of lumber as it was delivered and shipped. Skead had no yard, and the lumber that did not remain in the canal boats in which it was brought to the port was stored with the Brooklyn Wharf and Warehouse Company on their breakwater at Erie basin. Advances of money were made to him, from time to time, by the defendants to enable him to purchase the lumber necessary to fulfill his contract with them, as he had little or no capital. It appears that on November 16, 1898, he was indebted to them in the sum of $6,889.32 for advances; that he applied on that day for an advance to enable him to purchase or pay for six boatloads of lumber, nearly all Para shippers of the description required by the defendants for their rubber trade; that they demanded security and that he thereupon pledged all of his lumber on the Erie basin breakwater to secure $2,500 then loaned to him, although he was then entitled to be credited and was credited on that day with the sum of $3,319.21 for lumber delivered. Two days later Skead pledged the breakwater lumber to secure another advance of $2,500. November 23, 1898, he was credited with $4,134.83, and on the twenty-ninth of the same month he again pledged the lumber to secure a loan of $500. On Decernber eighth he pledged the same lumber and the lumber in the canal boats E. W. Parsons and E. D. Stears to secure an advance of $1,500. These advances were charged to Skead in the “account current” with the other loans or advances, and all the payments made by the defendants for lumber delivered. December 9, 1898, an account was stated between the parties, when it was found and determined that $6,917.77 was due and owing from Skead to the defendants. December 13, 1898, Skead requested • another loan. He testifies that “ the first request for an advance that was refused was made around December 13, 1898. There was not a positive refusal; the matter was put to me by Mr. Christie (defendant’s representative) in this way: in order that they should advance me further funds I should protect them further by giving them security. * * * They Wanted to protect their interests in the matter — they wanted ' to be protected — they wanted further sceurity, and they wanted it in a different shape.” It seems that the parties thereupon entered into an agreement, the purport and effect of which was to pay Skead’s indebtedness to the defendants and to release the lumber on the breakwater from all liens for advances to that time. It was agreed that the defendants should take immediate title and possession of all the Para shippers in the six canal boats, amounting in the aggregate to 691,318 feet, and that the purchase price should be paid by crediting Skead with the amount “ on the account current kept by the parties of the second part with such amount as of the date of the opening of navigation on the Erie canal in the spring of 1899, or sooner if said lumber shall be shipped by the parties of the second part on board vessels for Brazil ports according to the quantity and as of the dates of said shipments.” It was also agreed that interest should be charged on all items of the current account from the respective dates thereof.

On the following day defendants paid or advanced $2,337.79, and Skead executed an instrument wherein he pledged to them all the lumber on the breakwater, being 569,468 feet, “ as security for any advances made or to be made by the parties of the second part to the party of the first part upon account current or otherwise, subsequent to the 9th day of December, 1898.” On the twenty-eighth day of December they advanced the further sum of $1,660.57.

The court found that “ the transfer of November 16, 1898, of lumber on the breakwater, which was of the value of sixty-four hundred and thirty 53-100 dollars ($6,430.53) was made in good faith and as security for future advances by defendants,” and also found that “ they thereafter advanced at divers times sums of money aggregating more than the value of such lumber, as stated above, and that such transfer is free from criticism.” The court also found that Skead, on November 16, 1898, “ was, and for a long time prior thereto liad been, insolvent; ” that excepting the transfer of November sixteenth of the lumber on the breakwater, they had reasonable cause to believe that. the other transfers complained of were made with the intention of creating for them a preference whereby they obtained a greater percentage of their antecedent debt than the other creditors in their class; that the defendants had no interest in or title to the proceeds of any part, of the lumber transferred to them December thirteenth and fourteenth, and that the plaintiff was entitled to judgment against the defendants for the sum of $6,542.10, the proceeds in value of the lumber so transferred which they had received, with interest thereon.

The appellants contend that the indebtedness agreed upon between Skead and the defendants was a secured indebtedness which was paid by the delivery of the lumber in the canal boats on the 13th of December, 1898. If they are right in this contention, the transaction on December thirteenth was a mere exchange of values; there was no preference, and the judgment must be reversed.

The determination of this question depends upon whether the secured or unsecured advances were paid by the lumber delivered to the defendants on the sixteenth and twenty-third of November, for there is really no contest in respect to the fact that ■ no other lumber was delivered or payment made by Skead to the defendants from the sixteenth of November, when the advances were secured, until the thirteenth of December, when the defendants claim they were paid. It is impossible to believe that Skead would have pledged the breakwater lumber on the sixteenth of November to secure the $2,500 then advanced, if the amount credited to him on that day for lumber delivered was applied to its payment. It is equally apparent that Skead would not have secured the payment of the $500 advanced on the twenty-ninth of November, or the $1,500 advanced on the eighth of December, if it had been agreed or understood that the amounts before credited for lumber delivered should be applied to the payment of these advances. No reason is given or suggested why Skead should give, or the defendant should take, security for debts that had already been paid. There is no evidence to support such a conclusion; on the contrary, we are entitled to assume from all the evidence in the case that it was the undoubted intention of the defendants, and that it was undoubtedly the intention of Skead, to apply the amounts credited on the sixteenth and twenty-third of November to the payment of the earlier and unsecured advances. It may also be observed that it is a general rule that where a payment is made upon general account, with no direction as to its application, the law applies it to the oldest items. (National Park Bank v. Seaboard Bank, 114 N. Y. 28, 35; Sheppard v. Steele, 43 id. 52, 60.)

I think that the indebtedness stated between the parties on the 9th of December, 1898, was the balance of the $7,000 secured by the lumber on the breakwater and in the two canal boats, and that this balance remained so secured until paid .by the sale or delivery of the Para shippers on the thirteenth of December. It necessarily follows from this conclusion that the transfer complained of did not reduce the fund applicable to the payment of the bankrupt’s creditors ; that it was a mere exchange of values, and that the defendants did not secure a voidable preference within the provisions of section 60 of the Bankrupt Act (30 U. S. Stat. at Large, 562). In order to render a preference voidable within the provisions of this section it is necessary to establish not only that one creditor obtained a greater percentage of his debt than any other creditor of the samé class, but also the giving of a preference within four months before the filing of a petition in bankruptcy, and a reasonable cause on the part of the creditor to believe that a preference was intended. (Sebring v. Wellington, 63 App. Div. 498.)

I am unable to gather from the facts anything to justify the conclusion that the defendants had reasonable cause to believe that a preference was intended by the transfers in question.

It is undisputed that Skead purchased the lumber in question for the purpose of delivering it to the defendants when called for; that they furnished or advanced the money to pay for it; that Skead delivered the lumber pursuant to the contract; and that the defendants paid the agreed price by releasing a lien of $6,430.53 on the breakwater lumber, by paying $2,000 on that day and $2,337.79 on the day following, when the lumber on the breakwater was pledged to secure the. overplus and other advances.

' It seems to me that the necessary conclusion from these facts is that no preference was in fact created by either of these transactions. If, however, they are capable of two inferences, one in favor of the integrity and the other to the contrary, the inference in favor of the position that no fraud upon the law was attempted must be the one that should prevail. This is certainly the rule in regard to fraud in fact (Morris v. Talcott, 96 N. Y. 100), and I can see no reason why it should not prevail in respect to fraud upon the law. (Johnson v. Rapalyea, 1 App. Div. 463.)

The judgment should be reversed and a new trial granted, costs to abide the final award of costs.

Goodrich, P. J., Woodward, Hirsohberg and Jerks, JJ., concurred.

Judgment reversed and new trial granted, costs to abide the final award of costs. ■  