In re Wolf Co.

164 F. 448, 1908 U.S. Dist. LEXIS 220

• Court: District Court, M.D. Pennsylvania
• Decided: September 29, 1908
• Docket: No. 976
• Status: Published

Opinion

ARCHBARD, District Judge.

On January 12, 1907, the Wolf Company, of Chambersburg, Pa., the present bankrupts, assigned to J. S. Allender, a creditor, an account against the Pacific Export Lumber Company amounting on its face to $14,593.33, but on which only $7,500 was really owing, to secure a promissory note of $8,000 for money which Allender had loaned to the Wolf Company, which had been due since November 1, 1906, and on which he was pressing for payment. Within three months afterwards, on April 8,1907, the Wolf Company were put into bankruptcy in this court, and a receiver appointed, who subsequently gave notice to the lumber company not to pay the account to Allender; the transfer being contested on the ground that it was a preference. Payment having been refused, Allender has petitioned the court to order the receiver to withdraw his notice and permit him to get the money. The master, to whom the case was referred, sustained the contention of the receiver and recommended that the petition be dismissed, and the case now comes up on exceptions to his report.

The assignment was clearly a preference- — whether voidable or not is another matter — and the court cannot, therefore, be expected to do anything to help it out, if that is what is wanted. Pollock v. Jones, 10 Am. Bankr. Rep. 616, 622, 124 Fed. 163, 61 C. C. A. 555. But, rightly considered, that is not the case. The assignment was a complete transfer of the account, vesting title in the creditor, and giving him full authority over it, including the right to sue and collect it, if necessary. The transaction being thus an executed one, there is nothing left to do but to give effect to it, unless it is tainted. The notice from the receiver merely tied up the matter; the lumber company, had suit been brought by the present petitioner, being bound to pay it. The rule taken on the receiver to withdraw his claim may serve to facilitate the collection; but, however decided, it confers nothing on the creditor that he did not have already. And the money, by arrangement between the parties, having now been paid over to the receiver upon the understanding that it was to be disposed of according to the views entertained by the court of the transaction, the petitioner is entitled to it, unless the court is convinced that it amounted to a voidable preference.

The question whether the transfer was a voidable one depends on whether Mr. Allender had reasonable cause to believe that a preference was intended; that is to say, that he was getting a prohibited advantage over other creditors similarly situated. He was if the company was insolvent, but not if it was not; and the case turns, therefore, on whether the signs of insolvency were such as to put him on inquiry, affecting him with whatever it would have discovered. It is not easy to decide, much less to point out in advance, what will amount to notice; each case standing pretty much on its own bottom. Mere financial embarrassment is not always enough, although it usually will be. The law differs somewhat in this respect from what it was formerly, owing to the different meaning given to insolvency, which, under Act March 2, 1867, c. 176, 14 Stat. 517, existed if the debtor was not in a condition to pay his debts in the ordinary course of business (Toof v. Martin, 13 Wall. 40, 20 L. Ed. 481), but not now, unless the aggregate of his property is insufficient to meet his obligations.

In the present instance, the Wolf Company was embarrassed, and, as we now know, insolvent; but whether insolvency was so plainly indicated that Mr. Allender could not properly close his eyes to it is a question. There is no doubt that before the last renewal of his note, May 1, 1906, he hesitated about extending it, and when it came due November 1st, he insisted upon payment, although even then he was ready to more than double the loan if' it could be properly secured. Meantime, also, in the preceding July, in an interview with Mr. Walk, the treasurer, he was told that the company was indulging in Southern lumber operations the outcome of which was not encouraging, and in October, in a talk with Mr. Gladhill, another salesman, he expressed doubt as to the safety of the loan, stating that he had written to Walk about it, but could get no answer; and on visiting Chambersburg, about November 10th, he was told by Walk that the note had not been paid because the company had no money. But, on the other hand, he was assured by H. G. Wolf, the president, who was supposed to be a personal friend, that his money was safe, and in accordance with a proposed reorganization of the company, which was under consideration by a syndicate who had taken an option on the property, he was offered the obligation of Aug. Wolf & Co., an auxiliary concern, who were to take over the lands of the Wolf Company in different states, as well as certain personal assets, and assume the floating indebtedness. Allender thereupon consulted Mr. Ruthrauff, a prominent attorney of Chambersburg, who in turn went to Sharpe and Elder, who were conducting the matter for the syndicate, and got from them the particulars of the scheme, after which he advised Mr. Allender to accept the note of Aug. Wolf & Co., provided 80 shares of the preferred stock of the reorganized company were put up as collateral, and this arrangement was agreed to; the Wolf Company being given until December 1st to carry it out, which was subsequently extended to January 1st, the reorganization not having been perfected by December 1st, as expected. In the meantime, however, the expert accountants, who were investigating the affairs of the company in the interest of the syndicate, made an unfavorable report, and when Allender came to see about his note, January 1st, he was informed that the contemplated reorganization was not going through, at least with these parties. Walk told him that the option had been withdrawn at the request of Mr. Wolf, and that the syndicate had given 90 days in which to repay the $92,000 which had been advanced — $10,000 of which was to be taken care of February 1st, $30,000 more by March 1st, and the balance by May— which he expressed his doubt of the ability of the company to do, depending, as it did, on Mr. Wolf’s getting the money from other sources. But Mr. Wolf himself explained that he had called off the deal because he had not been fairly treated in the appraisement of the property, stating at the same time that the trade debts had been taken care of by Aug. Wolf & Co. down to about $30,000, including the note of Allcn-der, and that the Wolf Company in consequence was better off financially than it had been for years. He further promised Allender to pay his note within 10 days. Coming again to Chambersburg at the end of that time, Wolf was not on hand to meet him with the promised money. This made him angry, and he accused Wolf to Walk of intending to beat him out of it, threatening to sue the company before the day was over. Walk told him, if he did, it would precipitate matters, and neither he nor other creditors would be paid as much as if he let his claim stand, expressing the belief that, if he did, he would get what was due him. In a couple of days Mr. Wolf appeared, and stated that he had been disappointed in his expectations and had not got the money, and after a discussion, in which Mr. Ruthrauff participated, of means which were available to secure the note, the account against the lumber company was offered and accepted, and the assignment followed.

These are not all the facts, but they are the main ones, and give a fair idea of the situation; and the question is what is to be deduced therefrom. It was plain, of course, that the Wolf Company was in embarrassed circumstances. Its debts were known to be large, its operations extended, and some of them, at least, unprofitable, and new capital was needed to carry on the business The proposed reorganization had also failed, at least with the existing syndicate, and the money advanced by them had got to be repaid shortly. But, on the other hand, tt did not follow, from any or all of this, that the company was insolvent in the sense that its assets were not sufficient at a fair valuation to satisfy its obligations. If its debts were large, so was its plant and its business; its machinery being sold all over the United States, and even as far as Japan and China. In the proposed reorganization preferred stock to the amount of $400,000 was to be issued, and a like amount of common; the syndicate who were to finance the operation putting up $150,000 to take care of the outstanding bonds and getting $180,000 of each kind of stock, and W. G. Wolf on his part receiving $170,000 of each, leaving $50,000 of each in the treasury. If figures of this magnitude were at all justified, as they apparently were in the contemplation of the parties, it was hardly suggestive of insolvency. It is true that the reorganization had fallen through; but, as explained by Mr. Wolf, the option was withdrawn at his instance, because he had not been fairly treated in the appraisement, and not necessarily, therefore, because the syndicate was not satisfied 'to go on with it, or to go on upon another basis.

It is said, however, that along in November or December, which was about the time that the expert accountants closed their examination, Allender had said to John T. Pensinger, another salesman, that he had heard bad reports about the company, and that, if they were true, the chances were that he would lose a lot of money; and Gladhill says that Allender knew the result of the examination, as every one did about the office, and discussed it with him frequently before the time of the transfer. But, on the other hand, Gladhill admittedly told Al-lender in November that he believed the company was solvent, and Pensinger, although a director, says that the suggestion of Allender was an entire surprise to him; while Walk, the treasurer, says that the report of the experts, which was not made until the middle of December and was kept from the public, was the first that he knew otherwise. The fact, also, on which some stress is laid, that, as was known to Al-lender, the company had sent out letters to creditors requesting an extension, and asking them to accept the notes of Aug. Wolf & Co. in settlement, is' met by the further fact that this was done in pursuance of the scheme of reorganization, and according to H. G. Wolf, the president, had resulted in putting them in far better shape than they had been. While, then, there may have been abundant signs of embarrassment, the same cannot be charged as to insolvency. The most that can be said is that there was enough, to put Mr. Allender on inquiry. But where could he inquire, that he had not ? Or what further could he hope to elicit? He had appealed to H. G. Wolf, not only as an officer of the company, but as a friend, putting him o'n his honor, and had been assured by him of the safety of his debt. He had again gone to Walk, the treasurer, more than once, and, while his statements were somewhat noncommittal, they certainly were not alarming. He had also consulted Mr. Ruthrauff, a local attorney, who had in turn gone to Sharpe and Elder, the attorneys engaged in the reorganization ; and surely he did not need to repeat all this, or to call for new assurances. Nor can he be charged with notice that the condition of the company was other or different than had been so represented to him. The suggestion of Gladhill that Allender knew what the experts had reported, and had discussed it with him, is denied by Allender, and, aside from this, is too general and sweeping a statement to be accepted as proving actual knowledge, as is the finding of the master based upon it. He may have known that the report was unsatisfactory, as was evident, because the reorganization was not carried out as contemplated. But that is far from knowing that it showed the company to be insolvent. Nor did he manifest any more anxiety about his claim than he had before that, as would have been the case if he had such knowledge. The idea that Allender could go to the books is not to be thought of. Neither could he expect to get access to the report of the experts, if it had been asked for. It is not intimate and inaccessible information, such as this, that a creditor is bound by, but that which is open to observation and will yield to reasonable inquiry, where it has not been expressly brought home to him. No doubt, in the present instance, Allender was anxious over his debt, and pressed for its payment, and may have expressed apprehension with regard to it. But this is not to be carried too far, nor made to operate too strongly against him, particularly in view of the assurances which he had received from those best calculated to know, on which he had the right to rely, to the contrary.

The special master has made an admirable report, from which I may well hesitate to differ, although his findings in some respects go further than seems to be warranted by the evidence, notably at the close.of the seventh and tenth paragraphs, and possibly in other places. His conclusion, also, that the assignment was executed without authority, was abandoned at the argument. But he is particularly mistaken, as I am constrained to feel, in holding that, all things considered, there was reasonable cause to believe that the company was insolvent, so as to make the transfer of the security in question a preference which further inquiry, if prosecuted, would have disclosed. This, in my judgment, cannot be sustained; and, the transfer being otherwise valid, the money realized on the account which was assigned to the petitioner must be turned over to him to apply on his claim.

And it is so ordered.