Schroth v. Monarch Fence Co.

KNAPPEN, Circuit Judge. Appeal from an order allowing reclamation of certain property sold by appellee to the bankrupt, on the ground that the purchase was fraudulent, in that the purchaser was insolvent and had no reasonable expectation of being able to make payment when due. The referee was of opinion that the claim of fraudulent purchase was not made out, and denied the right to reclaim. The District Judge took the opposite view, and so reversed the referee. [1] The case turns upon a determination of the question of fraud-' ulent intent in the purchase, which question is purely one of fact. The goods were ordered May 29, 1913, were delivered July 2, 1913, and were to be paid for January 1, 1914. At the time of purchase and delivery the milling company was doing a large and active business. It was insolvent in fact, and had been in that condition for a long time prior thereto. It had, however, excellent credit at the bank, which was its principal creditor. By the bank’s failure, which occurred about the middle of August, 1913, the milling company’s affairs came to an abrupt crisis, resulting in the immediate closing of the mill on August 18th, the appointment of a receiver at about that time, and involun [551] tary bankruptcy proceedings on September 6th. That the milling company did not anticipate failure in at least the near future is evidenced by the fact that between May 29th and August 18th it continued to do business in the regular course; its receipts and disbursements during that period being each about $60,000. It made regular payments of indebtedness, including $500 paid appellee June 29th upon a previous bill. Had the bank not failed, the milling company’s credit would have continued apparently indefinitely, and it ceased business only because of the bank’s failure, which the evidence does not indicate the milling company had any reason to anticipate. These facts, on their face, are inconsistent, in our opinion, with a lack of reasonable expectation on the part of the milling company of being able to pay the bill in question when due. Such conduct was not the natural course of a debtor realizing that it stood on the brink of failure. As was suggested by the referee, if the evidence presented is sufficient to show that the property in question was bought without intent to pay for it, the evidence would as clearly show that a purchase made a year earlier was likewise fraudulent and without intent to pay, although it appears that such purchases were all paid for. In reaching his conclusion the District Judge was impressed by the view that the milling company could not reasonably have expected that the existing abnormal relation between it and the bank would continue until the bill in question matured, and so must have anticipated its own early collapse, and by the fact that no one on the milling company’s behalf testified directly to a reasonable expectation of being able to pay. The disappearance of the milling company’s manager at the time of its failure made such direct testimony apparently impossible. While the considerations which controlled the mind of the judge have weight, and while the bank’s action in carrying the milling company’s indebtedness, not only in an excessive amount, but, as it did, largely by way of overdrafts, shows an abnormal condition, yet these facts do not, in our opinion, outweigh the evidence leading to the conclusion reached by the referee. The circumstances are in many respects similar to those which we considered in Kimmerle v. Farr, 189 Fed. 295, 111 C. C. A. 27 (involving alleged preferential payment), and the rules there applied are pertinent here. [2, 3] It scarcely need be said that the appellee has the burden of showing the fraud alleged, and that in its alxsence the goods in question cannot be reclaimed from the trustee in bankruptcy, notwithstanding the buyer’s insolvency and the seller’s ignorance of it, whelher the transaction is judged by the rule pertaining in Ohio or by that prevailing in Michigan. Talcott v. Henderson, 31 Ohio St. 162, 27 Am. Rep. 501; Skinner v. Michigan Hoop Co., 119 Mich. 467, 472, 78 N. W. 547, 75 Am. St. Rep. 413. A careful consideration oi the record fails to convince us that'the milling company was without reasonable expectation of paying for the bill in question. [4] The fact that the bank is the principal creditor of the milling company does not impress us as creating an equity in appellee’s favor. While the large credit extended to the milling company was unbusinesslike, the record does not even tend to show a purpose on [552] the bank’s part to defraud or prejudice those who should sell to the milling company. "In our opinion the order of the District Court should be reversed, with costs, and the cause remanded, with directions to dismiss the petition for'reclamation.