Fechheimer v. Baum

Speer, J., (after stating the facts as above.) Baum & Bro. and Baum & Co., two firms composed of the same individuals, are traders, in the meaning of the statute of this state quoted above. That they are insolvent it is conceded. The plaintiffs are creditors, whose demands, as the court is at present advised, are within the class provided for in the statute above quoted, (Code Ga. § 3149a,) giving, in certain cases, the equitable right to the extraordinary remedies applied for. This right of the creditor to put the debtor’s assets, when the latter is an insolvent trader, in the hands of a receiver, is peculiar to the law of this state. It has no existence in the general jurisprudence of equity which obtain in these courts. It is now settled, however, that the courts of the United States may administer an equitable right granted by the law of the state in suits of which, from other reasons, they have jurisdiction. It was urged in argument for the defendant that the creditors, without a judgment at law, have no right to apply in equity for the appointment of a receiver. That this is a general rule is undeniable, but there are exceptions to it, and one of these exceptions of apparently clear distinctness is where the law-making power has enacted in terms that the debt need only bo mature, with payment demanded and refused, as is the law in Georgia. It is true, also,—as held in this circuit, in Jaffrey v. Brown, 29 Fed. Rep. 477,—that a party not intending to pay, by inducing one to sell him goods on credit through the fraudulent concealment of his insolvency and of his intent not to pay for them, is guilty of a fraud, which entitles the vendor, if no innocent third party has acquired an interest, in them, to disaffirm the contract, and recover the goods. See, also, Crittenden v. Coleman, 70 Ga. 295; Donaldson v. Farwell, 93 U. S. 633; note to Jaffrey v. Brown, 29 Fed. Rep. 485, and authorities cited. The remedy at law must be quite as complete as that in equity to defeat the power of equity to proceed. Id. The demurrer filed to the bill, while not finally overruled, is not deemed sufficient, as the court is at present advised, to defeat the relief [176] sought by the bill, should that relief be granted. The chancellor has given very anxious thought and careful inquiry to the ascertainment of his duty in the premises. It is true that the prayers of the bill seek to obtain perhaps the most vigorous and far-reaching action in .the power of the court—action which should not be taken in cases of this character, except in the presence of plain fraud or irreparable injury. On the other hand, the statements of the defendants themselves show.the most utter insolvency, and a failure to comply with their duty to their creditors, which evinces either negligence of the most flagrant character, or fraud scarcely less marked and decided. Upon the 21st of May, whatever may have been the motive which led to the publication, it is undeniable that the defendants gave to the mercantile community, by means of a usual and widely known commercial news agency, a statement which shows remarkable solvency, and indeed prosperity, for their section of the country. “Our total■ assets,” they said, “are seventy-six thousand dollars; our liabilities, thirty-six thousand dollars, net. After allowing for shrinkages, bad debts, and so forth, we consider ourselves worth fully thirty thousand dollars over liabilities, etc. There are no mortgages or liens on our property, either real or personal. Our stock is insured for thirteen thousand dollars. When we borrow money from bank we deposit our bonds and stocks as security. When we borrow money from our factors we give farmers’ notes as collateral; give no other security.” In a little more than six months we find this firm in debt $150,-903.44, with total assets of $83,926.19, leaving debts to the amount $66,976.25, altogether hopeless. In other words, in a half year there had been a change for the worse in their condition of nearly $100,000,— if their respective statements to Bradstreet’s and to their creditors is reliable. ■ For this startling transformation of their condition they offer neither explanation nor excuse. There had been no disaster from flood or lire, no epidemic, none of those extraordinary circumstances which at times cause the .stoutest business houses to tremble. In May there is an indebtedness of thirty-six thousand, in December a debt of one hundred and fifty thousand. In May there are neither liens nor mortgages, in December they approximate seventy thousand dollars. In the spring creditors were assured of prompt payment, in the fall they are met by hopeless insolvency; and yet the court is asked to consider this an innocent and unavoidable failure, and this, too, in the absence of a syllable of proof to account for it. What makes it more remarkable is that the business was conducted in quiet villages, and among a rural population, where all.legitimate trade was marked by careful purchases and conservative transactions; where every purchaser is personally known to the merchant,'—his solvency and disposition or ability to pay debts as familiar as household words. But this is not all. In the proclamation of Baum & Bro. to the business community of the country, they say “there are no mortgages or liens_ upon our property.” At that moment it was all incumbered with a secret obligation which a court of equity in a proper case would declare to have all the effect of a mortgage. In less than six months every cent’s worth’ of their stock or other assets, whether paid [177] for or not, is shingled with mortgages, made in pursuance of that covert stipulation. In the presence of such facts as these it would seem futile to urge upon the court the considerations of business capacity and business integrity and mercantile popularity, which form so large a part of the defendants’ showing. “ We give to our factors no security save farmers’ notes.” As that public pledge was being made their contract was in existence, not only to give two dollars for one, in notes and ehoses in action, for every dollar obtained from their factors, but to give mortgages which are uudeniably other and very different security. “Our stock is insured for §13,000;” said they to Bradstreet’s,—they did not say the policies had been pledged to 11. M. Comer & Co., and out of the reach of other creditors. It would seem superfluous to analyze the widely variant statements of the defendants, and it requires no elaborate inquiry to ascertain the law controlling the rights of the parties with such facts before the court. The statutes of the state are sufficiently explicit. Suppression of a fact material to he known, and which the party is under an obligation to communicate, constitutes fraud. The obligation to communicate may arise from the confidential relations of the parties, or the peculiar circumstances of the case. Code Ga. § 317o. Can it bo doubted that the fact that the defendants were under a written obligation to execute mortgages upon their entire stock and all their other property, was “'material to he known” by those giving them credit? Can it bo doubted that when the Baums undertook to give to Bradstreet’s, for the information of the business world, a statement of their assets, liabilities, and methods of borrowing money, that the obligation was upon them to communicate the truth? Will the most credulous believe for a moment that Fechheimer & Co. would have given them credit for $4,000; that Clailin & Co. would have given them credit for $11,000,—had they known the existence and the nature of their obligation to Comer? We think not. The statements of such mercantile agencies as Bradstreet’s are intended to influence the action of merchants and others who give credit. It is well understood that the mercantile community relies largely upon such statements, and the persons giving them are under the weightiest obligation, which will be enforced in foro comicientim, to speak the truth. If there has been deliberate suppression of a vital fact in a statement of this character, which does mislead, it is a fraud upon the person misled, which a court of equity will redress, if possible. Again, “misrepresentation of a material fact, made willfully to deceive, or recklessly without knowledge, and acted on by the opposite party, or, if made by mistake, and innocently, and acted on by the opposite party, constitutes legal fraud.” Code Ga. § 3174. Idee, also, section 2634. Now, it appears from the evidence of Messrs. Patterson, Lindsay, and Cohen that N. B. Baum admitted in their presence and hearing that he was insolvent at the time the statement to Bradstreet was made, although he there asserted a net worth, above all liabilities and doubtful assets, of fully $30,000, but that he did not then know his insolvent condition. Conceding, therefore, that this statement was honest, it is none [178] the less fraudulent in contemplation of these provisions of the Code. It follows that, even in the absence of the insolvent traders’ act, before quoted, the plaintiffs would be entitled to the relief they seek if it can be made to appear that there is a prospect of redressing their wrongs thereby. Much more, then, are they so entitled under the provisions of that act. It is said, however, for the defendants, that the liens created by Baum & Bro. to Comer and others will exhaust'the assets, and that the unsecured creditors can get nothing through the action of a receiver, however vigilant he may be. But the defendants themselves admit that the assets amount to about $86,000 more than the preferences he has given. It is true that he states that $72,310.54 of notes and accounts are worthless and doubtful, but the court is not inclined to accept this statement as final. It would be very remarkable if his doubtful debts in December should be as much as his total assets in May. A diligent receiver will collect many of those claims, or the court will know the reason why. Besides, by the same statement there is a balance of $14,300.39 to be divided among the unsecured creditors. This is itself no mere bagatelle. We have known original suits to be-brought for less. But perhaps more important than either of these is the fact that Comer & Co., who only claim $24,671.07 as the sum of their demands against the Baums, have now in their possession $50,000 worth of good notes and accounts, and mortgages on $49,000 worth of property consisting of merchandise and other personalty and certain realty. However valid may be the demand of Comer & Co., when it is paid they will not be permitted to retain a dollar in excess of their proven claims. It is true that by the law of Georgia, section 1953, “a debtor may prefer one creditor to another, and to that end he may bona fide give a lien by mortgage or other legal means, or he may sell in payment of the debt, or he may transfer negotiable papers as collateral security, the surplus in'such cases not to be reserved for his own benefit or that of any other favored creditor, to the exclusion of other creditors.” The large surplus conveyed to Comer & Co. to secure their debt they hold as trustees for the creditors of the defendants, the Baums. Besides, the balance which Comer & Co. present is ascertained by estimating more than 500 bales of cottpn shipped to them at $38 a bale. They have turned over notes and accounts of the insolvent firm to one of its members for collection. This will not be permitted. The insolvent debtor who has failed under such circumstances is not the best custodian for convertible assets of this character. This investigation has satisfied the court that this is a suit where it is manifestly the duty of the chancellor to make the orders prayed for. A receiver will be appointed, and an injunction granted. Comer & Co., who are now formally made parties defendant to the bill, will be required to make proof of their account, and if found just and true and a valid lien, as it now appears to be, it will be paid in full if the funds are sufficient. This is true of other debts of superior dignity, and the remainder of the fund in the hands of Comer & Co. and elsewhere within the reach of the court will be apportioned to the creditors. The court will appoint receivers of undoubted qualifications, who will at once take possession of [179] the assets of the insolvent firm, and as fast as collected pay the funds into the registry of the court, and the cause will proceed with the utmost expedition