Wright v. Fergus Falls Nat. Bank

Mitchell, J. This action was brought by the plaintiff, as assignee of the Page Flour Mills, under the fourth section of the insolvent law of 1881, (Laws 1881, ch. 148,) to set aside, as an unlawful preference, a judgment obtained by the defendant bank against the insolvent by default, and on the same ground to recover payments on the debt sued on, made by the insolvent after the commencement of -the action and before judgment. Our views as to the weight and effect of the evidence are so at variance with those of the learned judges who tried the case that it becomes necessary to state the testimony somewhat at length. The insolvent was a corporation engaged in the milling business at Fergus Falls. Henry G. Page was its president and treasurer and principal financial manager. He was also president of the defendant bank, having his office in the bank building, and being evidently also the controlling spirit of its financial policy. The mill company was a customer and depositor of the bank, and also a large borrower from it, being on September 25, 1890, indebted to it in about $45,000 on overdue paper executed by Page, as president, in its behalf. Its account with the bank had also been continuously overdrawn, since the previous May, from $1,000 to $2,000, and was then overdrawn to the amount of $1,777. It was at this date (September 25th) hopelessly insolvent, as the bank offi — 125 — cers well knew, its debts, mostly overdue, amounting to about $98,-000, and its property, consisting principally of its mill plant, not being worth to exceed $38,000 t'o $40,000. Two or. three days previously Boyd, formerly the cashier, and still.a stockholder, of the bank, had come from West Duluth, for the express purpose of attending to the claims of the bank against the mill company, and had been during that time in frequent consultation with Page on the subject. As to the precise nature of these conferences and the conclusion arrived at, Boyd and Page somewhat disagree, but what confessedly followed leaves no room for any reasonable doubt on the subject. On September 25th Page sent for Wright, the president of the First National Bank of Fergus Falls, which was a creditor of the mill company in the amount of $5,000, and on his arrival at the bank told him that the mill company had been losing a great deal of money, and was in bad shape, and that he desired to protect the local creditors, and that Boyd would explain the details to him. Page then called Boyd into the room. Boyd then said to Wright that there was some trouble; that the mill company had got to fail, and that there bad got to be a heavy loss; that he had a plan by which they could be protected as far as possible, but that under no circumstances would he disclose the plan to him without his giving his pledge of secrecy that he would not state it to any one else., Wright having given him this pledge, Page then (accepting as true his own version of it) told him the condition of the bank so far as the mill company was concerned, and that the plan was to obtain a judgment if they could, and make a levy on the property, and from the proceeds of that levy and sale to divide with him, the Citizens’ National Bank, (also a creditor of the mill company,) and their own bank, according to the amount of their claims. Wright testified that Boyd said that they must keep the matter very quiet, because if it got out it would upset the whole thing. Boyd really does not deny this, as he admits that he said that in conducting the suit it was unnecessary “to get out a brass band,” and inform the public that they had commenced it. Page was present during all this time, and at least made no objection to what was agreed on. Wright having assented to this arrangement, Page then sent for Compton, the president of the Citizens’ Bank, and when — 126 — he arrived the same thing was repeated that occurred with Wright, Page also being present. Compton, in behalf of his bank, also assented to the plan. It may also be stated that Compton was secretary of the mill company. On September 24th or 25th Page took up one of the overdue notes which his bank held against the mill company, by giving the check of the mill company on the bank for.the amount, which increased the overdraft of the mill company’s account to $7,159.47. Immediately upon the conclusion of the arrangement between the three local banks, the defendant bank employed counsel and commenced suit against the mill company for its entire claim, including this overdraft. The complaint in the action was filed by the attorney, with an injunction to the clerk of the court to keep it out of the newspapers, which was done; all other actions commenced during the week being, as usual, given out for publication, this one alone being suppressed. The attorney himself also served the summons on Page as president of the mill company, and made affidavit of service before the cashier of the bank. Page put the summons in his pocket, and never conferred about the suit with the other officers of the mill company, or even examined the summons to see whether the amount for which payment was demanded was correct. In fact, judgment was demanded for several hundred dollars too much. A bank in St. Paul held a note against the mill company for $5,000, which matured October 9th. On October 8th, Page, in behalf of the mill company, executed and sent to that bank a renewal note payable in 80 days, but made no mention of the commencement of the suit by the defendant bank. On the 10th of October a creditor of the mill company called on Page for payment of a note against the mill company. Page and the creditor disagree somewhat as to what passed, but Page admits that he told him to call again when he was in town about the middle of October, and did not mention to him the pend-ency of the suit by the bank. ' It also appears, without contradiction, that the officers of the three banks and of the mill company kept the suit a profound secret until judgment was entered. Between September 25th and October 15th the mill company, from time to time, made various deposits to the credit of its account at the bank, — 127 — amounting in all to about $5,000, and during the same time had checked out various sums, amounting to over $1,300, so that on October 16th the overdraft of the account was much less than that on September 25th. On October 16th, and as soon as the 20 days from the service of the summons had expired, the bank entered judgment against the mill company on default of an answer, for nearly $16,000, immediately issued execution, and levied on virtually its entire property, personal and real. On October 25th, the mill company, by Page, its president, and Compton, its secretary, executed an assignment for the benefit of creditors to Wright, who, it will be remembered, was one of the parties to the arrangement already referred to, and who was enjoined to secrecy. Page on one occasion testified, although rather evasively, that the reason he did nothing after the suit was commenced was that the mill company had no defense; but at another time he testified that he agreed with Boyd that the bank should have judgment, and that his object in keeping the matter secret was that the bank should get judgment, and thus obtain a preference over other creditors. Boyd and Evans, the cashier of the bank, testify that there was no agreement between them and Page that the suit should be kept secret in order that the bank might obtain a preference by securing judgment, but that secrecy was enjoined in order “to prevent a run on the bank.” They also testified that there was nothing said about the mill company not making an assignment until after the bank obtained judgment, and on this point there is no evidence contradicting them. On this evidence the court found as facts that the action against the mill company was commenced at the instance of Boyd and Evans, without any consultation or arrangement in relation thereto with Page; that there was no agreement between the bank and the mill company that no assignment should be made by the latter until the former should obtain judgment, or that the mill company should not defend the action; but that the mill company simply permitted the action to proceed to judgment, without any action on' its part. And in its memorandum the court says that it is unable to find any evidence of any intention on part of the mill company to give a preference to the bank, or that — 128 — they suffered judgment tó be obtained with a view of carrying out .any such intention; that there is no evidence of any positive or affirmative act from which any such intention can be inferred; that the mill company simply remained passive, and interposed no defense, because it had none; and that it was under no legal or moral obligation to make an assignment in order to prevent the bank from obtaining a preference; and therefore that the facts bring the case within the principles of law announced in Wilson v. City Bank, 17 Wall. 473. In arriving at this conclusion it seems to us that the learned court not only misconstrued the provisions of the insolvent law, but also failed to appreciate the force and effect of this evidence. It is not controverted, and cannot be, that a judgment suffered may be a “security given,” within the meaning of the fourth section of this act; and if suffered to be obtained in contemplation of insolvency, and with a view to give a preference to any creditor over another, it is ■void, the same as a mortgage would be, if given under like circumstances. In re Church & Graves Mfg. Co., 40 Minn. 39, (41 N. W. Rep. 241.) So, under the federal bankrupt act, to suffer one’s property to be taken on attachment, etc., with intent to give a preference, was synonymous with procuring it to be done. Any other construction would render the provisions of the law against preferences entirely nugatory. Of course, the mere fact that obtaining judgment results in a preference is not of itself enough to render it void; for, as is said in Re Church & Graves Mfg. Co., supra, the confessing or suffering the judgment to be obtained must be tainted with the intent to give the preference to make it obnoxious to the act; or, as said in Little v. Alexander, 21 Wall. 500: “When the issue to be decided .is whether a judgment against an insolvent was obtained with a view to give a preference, the intention of the bankrupt is the turning point in the case, and all the circumstances which go to show such intent should be considered.” As we view the evidence in this case, it conclusively establishes, not only an intention on part of the insolvent, in suffering this judgment to be obtained, to give the bank a preference, but also that there was actual collusion between the bank and it to accomplish that purpose. It is unnecessary here even to con — 129 — sider whether mere passive nonaction, strictly so called, on part of the insolvent, would be enough, for in this case the evidence is overwhelming that the mill company not only desired the preference to be secured, but promoted it by the very course of conduct best calculated to accomplish it. Keeping the matter secret, putting off other creditors until the time for entering the judgment arrived, and otherwise doing nothing, was, under the circumstances, the most effectual assistance that could possibly have been rendered to the bank in its effort to secure a preference. The excuse that the secrecy was to prevent a run on the bank has the air of extreme improbability. If that had been the object, it could have been more certainly attained by serving the complaint instead of filing it. The object in filing it was manifestly to bring the case within the proviso contained in the first section of the insolvent law. It seems to us that, if the evidence in this case does not make out a case of an unlawful preference, it would be impossible ever to make one out where it was secured by judgment, unless the parties were to deliberately sit down in advance, and enter into an express agreement to violate the law, and then publish it to the world. Conceding that Wilson v. City Bank, supra, would be in all respects an authority under our insolvent law, a comparison of the facts certified up in that case, with the evidence in this, will show how entirely dissimilar they are. As there must be a new trial, it is unnecessary to consider the second branch of the case regarding the preferential payments. It may be said, however, that if the object of giving and receiving a check for an already overdrawn account in payment of the overdue note was to increase the overdraft sufficiently to absorb any possible deposits that the mill company might be able to make before it was closed up on execution, and thus obtain part payment of a pre-existing debt in a way that would have the appearance of being done in the regular course of business between banker and depositor, but which was in fact a device to evade the provisions of the law against preferential payments, the arrangement cannot stand. The action of the bank in continuing to pay checks drawn by the .mill company as evidence that the business was being done in good faith, in the regular course of affairs, loses much of its weight in view of the fact — 130 — that it was manifestly to the interest of the bank to keep the mill company afloat until it obtained judgment. The amount which the plaintiff would be entitled to recover, if a recovery be had, would be simply the net amount which the bank actually received upon itspre-existing debt, as shown by the state of the account on October 16th. The rule as to the application of payments upon an account, which counsel invokes, is not, in our judgment, applicable. Order reversed. (Opinion published 50 N. W. Rep. 1030.)