BRENT et al. v. SIMPSON, 238 F. 285

GRUBB, District Judge (after stating the facts as above). The appeal presents a number of questions upon the admissibility of evidence, only one of which is important under the conclusions .we have reached. The appellant offered evidence tending to show that the receipt for the securities in controversy dated April 30,1913, was made to read in favor of Knowles Bros., instead of W. H. Knowles, through mistake of the draftsman. The court excluded this evidence, upon the ground that its effect was to vary the terms of the receipt, which were of a contractual nature. The receipt was twofold in character.

It was an admission by the signer of the receipt of the pledged securities, and it was a contract setting out the terms on which "they were to be held by the signer. In the first respect it was explainable by parol evidence. In the latter, it was not. Clearly the personnel of the deliverer of the securities was a matter that related to the instrument in its character as a receipt, rather than in its contractual character. Wayland’s Adm’r v. Mosely, 5 Ala. 430, 39 Am. Dec. 335.

It may be that the mistake, to be effectual, would have to be shown to be mutual; but the fact, if it was a fact, that the deliverer of the securities, who drafted the receipt, inadvertently placed the wrong name on the receipt, was evidence tending to show a mistake on the part of both parties to it, and competent. The appellants contest the jurisdiction of the court below, and cite the case of Park v. Cameron, 237 U. S. 616, 35 Sup. Ct. 719, 59 L. Ed. 1147, in support of their contention in that respect. We do not think that case is controlling of this case.

In either aspect of this case, certainly if the transaction of October, 1910, is the applicable one, the case is not one in which an officer of a bankrupt corporation has embezzled or misappropriated property of a corporation without its knowledge or consent, recovery of which is sought from him by the trustee. We think, as to both .transactions, the record shows that W. H.

Knowles’ transfers of the securities in controversy was authorized expressly or by acquiescence by Knowles Bros., and is assailable, if at all, because it was a transfer without consideration moving to the bankrupt, and under circumstances making a voluntary transfer a fraud upon its creditors. The question most seriously contested was that as to which transaction — that of October, 1910, or that of April, 1913 — was to be looked to in determining the rights of the parties. The trustee contended, and the District Judge held, that the transfer of April, 1913, was the determinative one.

The District Judge held that the transaction with 'the Importers’ & Traders’ National Bank of New York City was separate and distinct from that of the Sullivan bank pledge; that it embraced different parties and a different contract; that intestate’s indorsement to the Sullivan bank was still subsisting when he indorsed the note subsequently discounted in New York City, and the securities then held by the Sullivan bank; and that intestate by delivering the securities to the Sullivan bank extinguished the bailment and ended his rights as pledgee in the transactions with that bank.

It must be conceded, however, that there was but one debt of $50,000 for which W. H. Knowles was always primarily liable, and the intestate Brent always secondarily liable, until it was paid by his executors after the note to the New York bank matured; that the securities in controversy were originally pledged by W. H.

Knowles to intestate to secure his secondary liability for said debt; that he surrendered possession of the securities to the Sullivan bank, not in disregard of the object of the original pledge, which was to hold him harmless on his indorsement, but in furtherance of it, since payment of the debt out of the securities would have relieved him from liability on his indorsement; that, when the Sullivan bank was reluctant longer to renew the notes evidencing the original debt, the money to pay the debt was only procured from the New York bank on intestate’s agreement to indorse and actual indorsement of the note to that bank, which yielded the proceeds to take up the note at the Montgomery bank; that the indorsement of intestate was given upon a written promise, given by W.

H. Knowles, that the securities, released by the payment of the note to the Sullivan bank out of the money obtained from the New York bank on intestate’s indorsement, should be pledged with intestate to secure his new indorsement, which was done. Under the facts, a court of equity should consider the pledge of the securities uninterrupted from the date of their original delivery to intestate in October, 1910. The identity that is essential is the identity of the debt, not that of the parties to the notes evidencing it. The principal debtor in the note to the New York bank was W. H.

Knowles, just as he was in the note to the Sullivan bank. That there were additional or different parties for accommodation to the later note, or that the original parties occupied different positions on it, is unimportant, so long as the original debt and the original debtor, secured by the same indorser, are present. It is clear that the intestate would not have consented to surrender the securities to the Sullivan bank, except to accomplish the.payment of the debt due it, for which he was secondarily liable. His doing so was pursuant to, not in contradiction of, the original pledge.

It is also clear he indorsed the new note for the purpose of taking up with its proceeds the note on which he was already contingently liable. This was the effect of the written agreement between Knowles and intestate. It was also agreed that the securities, held by the Sullivan bank to secure the original debt, should be given intestate, when they were released by payment of that debt, to protect him on the new indorsement. Had it not been .so, he would have been the worse for the new transaction, since he would then have been without security for his indorsement in the same amount.

There was never a time from the intestate’s indorsement of the original note to the Sullivan bank in October, 1910, until the debt was paid by his executors, when he could have relieved himself from that indorsement. We can discover in the record no evidence of an intention on his part or that of Knowles, either to double the liability assumed by him upon his original indorsement, when he indorsed the note to the New York bank, of to relinquish the protection of the pledge of the securities given to secure his original indorsement.

It follows that he was always liable because of his indorsement of the original note of October, 1910, and always protected against liability on that indorsement by the securities, which the trustee now seeks to recover from him. This would malee the transaction of October, 1910, the controlling one, and the question of the bankrupt’s solvency or insolvency would revert to that date. 32 Cyc. 243; Nesbit v. Worts, 37 Ohio St. 378; Jarboe v. Shiveley, 109 Ky. 402, 59 S. W. 328, 95 Am. St. Rep. 384.

The transaction having occurred more than four months before the petition was filed, its validity is to be determined by the laws of Florida. Under the laws of Florida, a voluntary conveyance by an indebted grantor is prima facie fraudulent as to existing creditors. A showing that the grantor was solvent and that the voluntary transfer left it ample assets to pay its debts overcomes the presumption of fraud. If Knowles Bros, was solvent, in this sense, in October, 1910, the transfer, though voluntary, was valid.

Actual fraudulent intent on the part of the grantor is necessary to set aside a voluntary transfer at the instance of subsequent creditors. No such claim is made in this case. The solvency of the bankrupt in October, 1910, is not very satisfactorily established by the record. It is only supported by certain trial balances, which are merely an enumeration of credit and debit items, as shown by the books of the bankrupt, with no showing as to the real value of the credit items. The District Judge found it unnecessary to determine the question of insolvency at an earlier date than April, 1913.

If the determination were necessary to a decision of the appeal, we would hesitate to rule on it, on the present record. However, in order for the trustee to avoid the transaction as against the executors óf the intestate, it must appear that intestate was a holder of the negotiable notes pledged, in bad faith or with notice of their infirmities. The intestate in October, 1910, took the negotiable notes from W. H. Knowles, who had possession and apparent title, for a valuable consideration, viz. his indorsement of W. H. Knowles’ $50,000 note, and before maturity.

In this attitude, the burden was on the trustee to show that the intestate had notice of any infirmity in the notes. This is the settled .rule under the Florida and federal decisions. It is conceded that the intestate Brent, when he took the notes from Knowles in October, 1910, knew that they had been the property of Knowles Bros., and were being used by W. H. Knowles for his individual benefit.

There is no evidence, however, that intestate then knew either that Knowles had obtained the securities from Knowles Bros., the bankrupt, without paying value for them, or that he knew that the bankrupt was then insolvent. The transaction could be assailed by creditors of the bankrupt only if those facts were true, and, as against a holder for value before maturity of the notes, only by showing notice to him of those facts, when he obtained the notes.

Conceding that a taker of the notes might be charged from the indorsement on their face of any want of authority from the corporation on the part of the president of the bankrupt to deal with them for his own benefit, there was no such want of authority as to the October, 1910, transfer, since it was assented to by all stocks holders of the bankrupt corporation. Nor could creditors assail a merely ultra vires act of a corporate officer, unless it also resulted in depleting the assets of the corporation in fraud of creditors. Force v. Age-Herald Co., 136 Ala. 271, 33 South. 866. Under the Florida statute,

section 2958, General Statutes 1906: “Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.” It is also true that the bankrupt, if not actually solvent in October, 1910, continued thereafter to do business for more than three years as a going concern, and paid all its then creditors in full, except two, who were content to renew their claims till bankruptcy intervened.

It seems difficult to predicate notice to the intestate of an insolvent condition, if existent, that withstood bankruptcy for that period, and of which the bankrupt’s officers and creditors seemed unaware. Especially is this true in. view of the settled rule in favor of holders for value before maturity, adopted by the federal courts, that actual knowledge or willful abstention from inquiry, where inquiry would have disclosed the infirmity, is essential, and that mere negligence, or a failure to inquire, where a reasonably prudent man would have inquired, will not suffice.

Applying this rule to the facts in the record, we cannot impute notice to intestate either of the fact that W. H. Knowles paid no consideration for the transfer of the securities in controversy to him to Knowles Bros., in October, 1910, or that the bankrupt corporation was then insolvent or would render itself unable to pay its debts by the making of the voluntary transfer- to its president. The following authorities support our conclusion: Doe v. Northwestern Coal Co. (C. C.) 78 Fed. 62; Troy & Cohoes Shirt Co., Bankrupt (D. C.) 136 Fed. 420; Kaiser v. First National Bank, 78 Fed. 281, 24 C. C.

A. 88; Union National Bank v. Neill, 149 Fed. 711, 79 C. C. A. 417, 10 L. R. A. (N. S.) 426; National Bank of Commerce v. Sancho Packing Co., 186 Fed. 257, 110 C. C. A. 112. We find it unnecessary, in view of the conclusion reached, to decide the effect of the statute of limitations upon the transaction of October, 1910', or the claimed want of creditors who are in a position to successfully assail that transaction, and furnish proper representation to the trustee in bankruptcy in his endeavor to do so. The decree of the District Court will be reversed, with directions to dismiss the bill at the trustee’s costs.

If there is an equity in the securities in controversy over and above what the executors were compelled to pay on account of their intestate’s indorsement, the trustee, on proper application and tender, should be permitted to' redeem them from the executors. <§E»For other cases see same topic & KBY-NXJMBBR in all Key-Numbered Digests & Indexes <gss>For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes