Herschell-Spillman Co. v. McCulloch

MACK, Circuit Judge (after stating the facts as above). The gross fraud is conceded; the resulting right to reclaim unpaid-for goods found in the possession of the receiver, unless waived, is not contested. The several acts relied upon as creating a waiver of the fraud and an election to ratify the sales are the acceptance of the notes with knowledge of the fraud, the presentation of .one of them for payment after the entire fraud had been disclosed, and the appearance of the vendor in the bankruptcy proceedings as a creditor, through the action of Meese in signing its name as a $10,000 creditor to a petition to set aside an order for the sale of the property in the receiver’s possession. The first two acts raise questions of facts, the last a question of law. All were resolved against the trustee by the special master before whom [371] the testimony was taken. Not only are we unable to say that the evidence fails to support his conclusions of fact; a careful consideration thereof has led us to the same results. The verbal testimony that a knowledge of the fraud was not acquired until after the petition in bankruptcy had been filed is supported by the documentary evidence and the surrounding' circumstances. While demands for the payment of the overdue account were incessant in the first half of May, they give no hint of any knowledge of the fraud; on the contrary, petitioner expressly stated its belief that the delay was due more to “a lack of attention than lack of funds.” And when the notes were taken, petitioner’s agent went through the plant and found it running. Whatever suspicion as to the vendee’s condition in May, 1913, the delay in payment may have aroused, the record discloses no basis whatsoever for a finding that petitioner knew, believed, or even suspected that the financial statements of November and February were fraudulent. [1] Assuming that the note was presented for payment after a knowledge of the fraud had been obtained (an assumption not clearly supported by the evidence), did this amount to an election? Petitioner’s president and attorney were endeavoring to learn what they could. For this purpose they called at the bank; the bank would not and could not rightfully pay the note after the petition in bankruptcy had been filed; the note was not even due. The parties knew these facts; they knew that a presentation for payment must be utterly ineffectual, except as offering a method of obtaining further information. It cannot, therefore, fairly be said to evidence even the slightest intention of waiving the fraud» and relying on the contractual obligation. [2] While Meese’s act, if authorized, might he deemed some evidence of a waiver, it is unnecessary for us to' consider whether the filing of such a petition, the prayer of which was denied by the court, would be a binding election. First National Bank v. Barse Com’n Co., 198 Ill. 232, 64 N. E. 1097. Petitioner was a creditor for nearly $500 on the open account; as such, it had a right to join in the petition to set aside the order of sale. That it was therein described as a creditor for $10,000, instead of $500, was clearly an error on the part of the attorney, susceptible of explanation, especially as it was not relied upon by any one, and was totally ineifective in inducing any action by the court. Moreover, the petitioner, as owner of the property obtained by fraud, had even a béttcr standing than, a creditor to have the order of sale set aside; the allegation that it was a creditor, instead of a defrauded vendor endeavoring to reclaim the goods, was, in this aspect, too, an immaterial error upon which no one relied. [3] We do not, however, rest our conclusion on these grounds, for, in addition thereto, there was a total lack of authority in Meese to sign petitioner’s name as a creditor. Pie had been directed to reclaim the goods on hand, not to file a general claim as creditor, or to represent petitioner as a creditor in any part of the proceedings. His authority was limited; the acts of an attorney beyond the scope of his authority are without elfect upon the client, except in so far as the court or third parties, relying upon the apparent or presumptive authority, may have acted thereon. The unauthorized position taken by [372] Meese could not evidence an election by petitioner, except by estop-pel, and every element of estoppel is lacking. While a rescission because of fraud must be made .promptly after the discovery thereof, the time element is of little importance when bankruptcy precedes the discovery. No one but the claimant can be injured by the delay. Here, however, the petition was filed on the day set for the first meeting of creditors, six weeks after the bankruptcy proceedings had been begun, with- sufficient promptness for all purposes. [4, 5] One further question must be considered. On April 12, 1913, a check for $4,690 was sent. This paid in full for all motors delivered before April 1st and left $1,460 to be applied on the account for motors shipped thereafter. If all the motors which petitioner had the right to- reclaim had been on hand, repayment of the $1,460 would have been a condition precedent to their return. But a large number had been sold by the bankrupt; petitioner would be entitled to the proceeds 'thereof, if it could trace them; if not, it becomes a general creditor therefor, not under the contract as vendor, but on a quasi contractual obligation arising from the fraudulent misappropriation of the petitioner’s property. As against this claim, the bankrupt would have a set-off for the moneys paid and credited, not as against any specific motors, but on general account. Inasmuch as the claim greatly exceeds the payment, the balance, after allowing the set-off, is in favor of the petitioner. That it is now too late to file the claim in no manner affects the right of petitioner to retain the $1,460 on account thereof. The situation presents no question of the application of payments to one of several classes of debts. Neither the trustee nor the bankrupt could require the vendor to hold moneys paid on general account as a partial payment on account of motors, which, because of the fraud, the vendor could treat as never having been sold. It follows, therefore, that the special master erred in deducting this amount from the $3,800 allowed by him to the petitioner. The order of the District Court denying the prayer of the petitioner will therefore be reversed, and the cause remanded, with directions to enter an order in accordance with the stipulation for the payment to the petitigner of the sum of $3,800, together with its costs.