BEEBE et al. v. WELLS. In re FEDERATION SHOE CO., 153 F. 133

LOWELL, Circuit Judge. This is an appeal from a judgment of the District Court disallowing the appellant’s proof of claim against the bankrupt estate. The claim is based upon promissory notes given to Beebe, the appellant, by the bankrupt, the Federation Shoe Company,- and indorsed by another corpofation, the Pray-Small Company.

The referee disallowed the proof, and on appeal his order was sustained by the learned district judge, on the ground that the notes, being given for the debt of another, were without consideration, moving to the. bankrupt, and that the creditor did not purchase them in good faith, believing that a consideration for them existed. Morawetz on Private Corporations, § 423. The creditor contends that the notes were given by the bankrupt for value, and, if he can establish this, his claim must be allowed.

The Pray-Small Company, a corporation controlled by Small, owed .Beebe on promissory notes and on account about $10,000. The corporation was insolvent. In order to continue its business unhampered by its creditors, Small organized the Federation Shoe Company, the bankrupt in this case. A large part of the property of the Pray-Small Company was transferred to the bankrupt in exchange for its cor.porate stock. After this transfer, Beebe sought, through his counsel, Jones, to collect from the Pray-Small Company the amount due on the notes, or to obtain further security.

Jones had an interview with Small, in which Small described the condition of the two companies. Jones thereupon asked him to transfer to Beebe, as collateral security Jor the debt, the accounts receivable of the Pray-Small Company. This Small refused to 'do. Jones then suggested that the Pray-Small 'Company bell to the bankrupt a part of its property yet remaining untransferred, for which the bankrupt should give its promissory notes to tire Pray-Small Company, and that the Pray-Small Company should indorse these notes to Beebe.

This transaction in effect would give to Beebe an obligation of the bankrupt as security for the indebtedness of the Pray-Small Company. This, also, Small refused to do.

Jones further testified that he told Small: “I considered that this new corporation and the conveyance of the assets to tills new corporation was for the purpose of continuing the business of the old 'corporation, or enabling the old corporation, the people interested in •it, to keep along the business, and that it was in fraud of creditors, that they had no rigid to do it, that we had a right to have both companies liquidated and have a marshaling of the assets, and that we should do it I told him we should not permit the business to continue tis it was continuing at the ¡present time, and that, unless we got payment or security, we would close them both up. 'Then I advised him to talk with Mr.

Beebe about it.” •“I said I would force both companies into liquidation and have the assets marshaled, unless we had security or payment, and I suggested, myself, this method of their giving us security. The idea of security was abandoned later on, because it was just as well to have the notes witli the same maker and Indorser as to have the notes of the Pray-Small Company with these notes as collateral. It made no difference. We had the liability of each .company for the whole indebtedness.” ‘ What was the negotiation between Small and Beebe does not appear‘in evidence. Beebe was not called. Small had absconded.

A few days afterwards Beebe told Jones that he had not made much progress ■with Small. Jones then wrote a letter, which Beebe signed as follows: “Boston, Mass, March 20, .1902. “Xi. Tdnn Small, c/o Pray-Small Company, Haverhill, Mass. — Dear Sir: Since seeing, you I have given the matter of your indebtedness to our Arm pretty careful consideration, and am inclined to somewhat modify my request for payment. The situation is substantially this: Pray-Small Company owes L.

Beebe & Sons on open account $3,182.02 and notes amounting to $0,667.82 -.together with interest on both sums. “The assets of Pray-Small Company at the time of the formation of the ’Federation Shoe Company were undoubtedly sufficient in value to pay all ■of its indebtedness; but such payment would have required the liquidation ■of its business.

Instead of liquidating, Pray-Small Company formed a corporation. to wit, the Federation Shoe Company, to which it conveyed a substantial portion of its assets in payment of capital stock; and this capital stock is now held by Pray-Small Company. “From your standpoint it was desirable for you to continue on in business by this method. From our standpoint a liquidation of file business of the company was more desirable.

We do not care to continue to be creditors of a corporation which lias ceased to do business; but, on the other hand, do not care to unnecessarily cripple your new company by requiring a liquidation of the affairs of both companies, a marshaling "of the assets, and the payment of our claim in cash.

As you say it would be for the mutual benefit of both companies that the Federation Shoe Company should purchase some more of the assets of Pray-Small Company on reasonable terms, there seems to be no good reason why such purchase should not lie made, and payment could be made in the notes of the Federation Shoe Company.

We would accept the notes of the Federation Shoe Company as collateral security for the payment of our claims, said notes to be as follows: “81,500 in four months from date; $500 in five months from date; and $500 payable at the expiration of each and every month thereafter until the whole amount is paid, interest at five per cent. “We feel that this proposition is an exceedingly liberal one on our part and one of which you should be glad to avail yourself.

In conclusion, in order to avoid any possible misapprehension, I may add that we shall not allow our claim to stand longer in its present form, and must ash you for early and definite information as to your intentions in the matter. “Yours truly.” About April' 20th Jones received the notes offered for proof, signed by the bankrupt and indorsed in blank by the Pray-Small Company. On his inquiry, he was informed by Small that the property mentioned in the letter of March 20th had been transferred to the bankrupt. The old notes of the Pray-Small Company were thereupon surrendered.

Beebe contends that the bankrupt received value' for the notes, to wit, an implied agreement that Beebe would not carry out his threat to liquidate both companies. The trustee contends that this was no part of the consideration moving to the bankrupt, but only the merchandise which was to be turned over by the Pray-Small Company. In fact, there was no transfer of merchandise, if any merchandise existed.

An agreement not to prosecute a doubtful claim is a thing of value, and if Beebe made such an agreement, and if the agreement was the consideration of the notes in whole or in part, the trustee does not dispute that Beebe is entitled to share in the distribution of the bankrupt’s estate. Taking all the facts together, we are of opinion that the creditor’s contention is well founded. We attach particular importance to the purpose expressed by Jones in his interview with Small and reiterated in the letter of March 20th.

We accept his language as establishing his bona fide intention to institute proceedings in liquidation in order to protect his client’s interests. It was urged at the argument that no agreement to refrain from legal proceedings was made by Beebe; but by his whole conduct, by the surrender of the old notes, and by the taking of new notes in their place, Beebe impliedly contracted to forbear and to abandon his proposed proceedings in liquidation.

Had he instituted proceedings in equity to liquidate the two corporations before their notes fell due, this implied agreement would have been a sufficient defense to his suit.» Had he sought the same result by proceedings in bankruptcy against the Pray-Small Company, the Federation Shoe Company might have restrained him from thus breaking his agreement. If there was a valid contract by Beebe not to proceed against the two companies, we have little difficulty in holding that it was a consideration for the execution of the notes by the bankrupt.

Doubtless, a transfer of property from the Pray-Small Company was intended also as a consideration moving to the bankrupt for its signature to the notes; but we hold that this transfer was conceived and used by the parties as a method of strengthening the notes, while the implied agreement not to sue remained the principal consideration. As value passed from Beebe to the bankrupt in

part consideration for the notes, it follows, as above stated, that the creditor must prevail. We need not consider the other questions argued at the hearing arising from the failure of the Pray-Small Company to turn over any property to the bankrupt. The decree of the District Court is reversed, and the case is remanded to that court, with directions to allow the appellants’ proof of claims; and the appellants recover their costs of appeal.