author: CAFEEY, District Judge.

text:
    IRVING TRUST CO. v. MANUFACTURERS’ TRUST CO., et al. In re JOHN CONNORS, Inc.
    District Court, S. D. New York.
    Jan. 18, 1934.

      Charles Seligson, of New York City, for plaintiff.
    Newman & Bisco, of New York City (Henry Landau, of New York City, of counsel), for defendant Manufacturers’ Trust Co.
    Isidore H. Levey, of New York City (Jacob Landy, of New York City, of counsel), for defendants Jacob, Elisie, and Max Segal.
   CAFEEY, District Judge.

It is without dispute that everything with which we are here really concerned, arising under anything involved in the pleadings, occurred within four months prior to the filing of the bankruptcy petition. The issuesl raised by the nine causes of action are too numerous for me to take up in detail. I do not find it necessary to dispose of them all. On the contrary, I shall confine myself to what seem to me to be the issues which it is essential to pass on in order, as I conceive it, fairly to do justice between the parties. In other words, I shall go to the heart of the controversy. I shall, for convenience, use only round figures.

The issue which has been most controverted and most argued is whether or not the bankrupt was insolvent at the relevant times.

The evidence makes it perfectly clear that there was no substantial change in the financial condition of the corporation between February 19 and March 17, 1932. There was no substantial change either in assets or in liabilities. Such changes as occurred were insignificant, and were so small that they may be ignored for the purpose of ascertaining whether or not the corporation was insolvent. If it was insolvent on March 17, it was insolvent on February 19 and at all times intervening.

As I have said, I shall refer only to round figures. It is plainly established that the debts of the corporation were $35,000. Of those debts $19,000 were secured and $16,000 were unsecured. Were the assets, the aggregate of the property of the corporation, at a fair valuation less than $35,000 ? That is the question.

There have been a good many efforts to state the meaning of “fair valuation,” as employed in the bankruptcy statute (11 USCA § 1(15). The G-randison Case, 231 F. 800, 804, was decided by the Circuit Court of Appeals for the Second Circuit, and governs me. There Judge Rogers laid down the rule that “the fair cash value or the fair market value of the property as between one who wants to purchase and one who wants to sell the property” is the true definition. Dealing particularly with the valuation of ehoses in action, there have been other definitions ; but they come down to the same thing. In the Segen Case (D. C.) 196 F. 903, 905, for example, which concerned accounts receivable of an installment house, the court said that the valuation should be “such as would be available to the bankrupt himself with which to meet his liabilities within a reasonable time.” The term is further clarified in the Coddington Case (D. C.) 118 F. 281, 282, where the court says of the value of book accounts that it is not what “could be realized out of them in time by patient and persistent effort,” but rather, “It is their value now that is to be taken.”

Having in mind those announcements of the courts as to the tests to be applied, let us examine the figures that have been brought out in the evidence.

First, what was realized in the bankruptcy proceeding? The tangibles sold for $2,-635, and the intangibles, which are the accounts receivable, for $2,934, making a total of $5,569; in round figures, let us say $6,000. This was all that was available to pay $16,-000. Manifestly, therefore, if realization in the bankruptcy proceeding were a test, there was gross insolvency.

Undoubtedly what was realized in the bankruptcy proceeding is a pertinent fact to be considered. The witnesses testified as to how they arrived at their figures and how the sales were made. According to the appraisers, the maximum to which value of the tangibles could be raised is $4,000. After the bankruptcy, by his conduct Mr. Jacob Segal himself put a valuation on the intangibles as a whole; that is to say, on the unassigned accounts receivable plus the equity in,the assigned accounts receivable. He refused to give as much as $7,000 for them. He tells us that he brought on the bankruptcy for the purpose of paying the creditors 100 cents on the dollar, as well as with the expectation of getting something on his own stock and for the other stockholders. Yet for the entire accounts receivable, including the equity mentioned, he was unwilling to give $7,000 when the creditors’ committee was willing to recommend that the trustee accept it and the trustee apparently was willing to sell for that price. If we add the $7,000 and the $4,000, the total would be $11,000, with which to pay $16,000.

So, if we should apply the second test I have discussed, there was insolvency.

We have had a lot of testimony by an accountant. He made a comprehensive review of the books. Counsel have fully examined him as to how he arrived at every figure of consequence which he used. Out of the mass of material gone over he has furnished a pretty definite statement of both assets and liabilities. . I think I should go over it and give it careful attention.

According to the evidence, the total debts were $35,000. That sum is accepted by both sides. It is borne out by the books as well as by the oral testimony.

According to the accountant’s scheme of putting his valuations on the assets, they should have yielded slightly over $48,000. It will be noted that these identical assets as a whole yielded only $5,569 when they were actually sold during the bankruptcy proceeding; and the tangible portion was put down, as I recall, in the schedules at $2,900 or thereabouts. It is to be observed also that for the intangible portion, which was the greater part, Mr. Segal was not willing to pay as much as $7,000. Yet the accountant, according to his method of figuring, arrived at $48,-000 as the valuation of all the assets; that is to say, the accountant made estimates leading to that figure, under cross-examination by counsel for one of the defendants.

Let us see if $48,000 is a fair sum to be accepted through application of any of the tests which have been laid down by law. Let us employ some of the tests to ascertain, first, whether the amount allocated by the accountant to the accounts receivable is fair.

In the tabulation by which the accountant under cross-examination arrived at the figure of $48,000, he included the receivables in their entirety at a valuation of $39,000; the remainder of the assets working out at $9,000. Max Segal himself got $3,000 of accounts receivable. The testimony of Miss Cohen, as well as all the other testimony on the subject, indicates that the receivables turned over to him were choice. After about twenty-two months these netted him $914; in other words, considerably less than one-third of their face.

The entire face of the accounts receivable carried in the accountant’s statement was, as of February 19, 1932, a little less than $78,-000. If they were worth one-third — that is to say, if we should use the test of realization by twenty-two months of handling, whieh brought in less than a third — the total value would be $26,000. Could it be expected, however, if the accounts were put on the market for present sale in a transaction between a willing seller and a willing buyer, that they would bring as much as by twenty-two months of effort ? Obviously not. Or if we were to apply the test of giving to the bankrupt itself an opportunity within a reasonable time to collect on them, could it be expected that as high a ratio would come in as arose from the activity of Max Segal in pursuing choice receivables? It seems to me that, when in twenty-two months he could get only a third, the application of the test of one-third, as a criterion to determine what is a fair valuation in the sense of the bankruptcy statute, cannot properly be complained of by the defendants. Moreover, it is to be borne in mind that the one-third is taken from the actual handling by Max Segal himself, who was the collector for the bankrupt and knew the business.

Again, when analyzed, the testimony of Mr. Zagoren, who has had long experience with an entirely different concern in the line of business in which the bankrupt was engaged, is in substance that he employs about the same one-third test in estimating the value of receivables generally.

One-third of $78,000 is $26,000. In other words, this would mean that instead, as the accountant did, of putting the receivables in his statement at a valuation of $39,000, they should be put in at only $26,000, If that were done, then, standing alone, this would cause a reduction by $13,000 of the $48,000 total valuation put on by the accountant for all the assets as of February 19, 1932. Without any other change, on that basis, the assets would be worth $35,000, whieh is the precise amount of the liabilities. Is this, however, fair to the- trustee in bankruptcy?

Analysis of the bankrupt’s income tax return and of other documents in evidence shows that, at the minimum, $41,000 of the accounts receivable involved go back to the day of John Connors individually. They consist of debts owing by his personal customers, which came into existence prior to the organization of the corporation. They were considerably more than a year old at the time of the transactions under inquiry. At the time of the bankruptcy they were fifteen months old. Another analysis of the figures would carry the receivables, which should be classed as John Connors’ old accounts, to as high as $53,000. Let us see what is the result.

If there were. $41,000 of the accounts which were fifteen months old in the group with whieh we are dealing, a maximum allowance fer their value would be 10 per cent, of their face;. and I think it defies common sense to suppose that the corporation could have made a sale at higher than 10 per cent, of their face of accounts fifteen months old or over a year old. Indeed, it is a matter of general knowledge that it cannot be done in this community. If it be assumed that for the $41,000 there should bo an allowance of only 10 per cent., that would put their value at $4,000. Deducting $41,000 from the $78,000 total of the receivables, there would be left $37,000. Applying to the $37,000 the same figure, previously used, of a yield of one-third, we would have for them a value of just a little over $12,000 — call it $13,000. That would give a total yield from the whole of the accounts receivable of $17,000, instead of $39,000. If the yield were only $17,000, instead of the $39,000 carried in the accountant’s statement as the value of all receivables, this would mean a reduction of the $48,000, as the accountant’s total valuation of all assets, by the difference between the $17,000 and the $39,000, namely, by $22,000, and that would show the corporation to have been grossly insolvent.

The situation is even worse if we accept the other analysis, which is plausible. It would show that the accounts receivable going back to the time of their creation, when John Connors individually was doing business, ran as high as $53,000. The situation is still worse. The figure of $48,000 was made up on the assumption that the cost of collection would be $3,120. That is based on an estimated period for the collection and the salaries of two collectors. But, as I understood Zagoren, the minimum at which collections could be made is 20 per cent. If we should employ this 20 per cent, minimum, there would be an added 10 per cent, for cost of collection, whieh would further reduce the $48,000 as a valuation. Moreover, the testimony showed that there were other items of eost of collection likely to arise in the way of attorneys’ fees, court costs, and the like, which were not included in the 20 per cent.

It is perfectly plain that the rent deposit was not a salable asset. It therefore cannot properly he included in determining whether or not there was solvency or insolvency, and I do not understand either side to contend that it ought to be included.

Let me comment just a bit more upon the tangible assets. The accountant carried them in his statement as follows: The merchandise inventory at $4,200; the furniture and fixtures at $600; and the automobile at $300 —making a total of $5,100. They were sold for $2,635. The schedule signed by Mr. Segal himself, as I recall it, shows a valuation for them of $2,900. If we were to accept Mr. Segal’s own statement, that further reduces the amount.

It is plain to me that the bankrupt corporation was insolvent on February 19, 1932, and continued to be insolvent from then until the filing of the bankruptcy petition. There are some general facts which strongly substantiate this conclusion.

Why did Mr. Segal go into court and voluntarily throw the corporation into bankruptcy if it was not insolvent? His conduct is in the nature of an admission of insolvency. On $53,000 of gross business in the year 1931, the corporation lost $26,000. It went through a hard strain with its bank account in the latter part of 1931 and, save a comparatively few days, from September to January and for the whole period of 1932 up to its going into bankruptcy.

All those circumstances further persuade me that, upon actually applying any of the tests that are to be derived from the court decisions to which I have referred, the corporation was insolvent on February 19, 1932, and on any of the other relevant dates.

As counsel have recognized, there are two branches of our inquiry. The first relates to the $1,500 payment to the defendant bank on February 19, 1932. I shall now give consideration to that.

In the first place, is the bank liable for this sum?

It is clear that the bank, on being paid in full,' received a percentage greater than other creditors of the same class got or can ever get. The bankrupt then being insolvent, the sole question, as to whether there can be recovery against the bank under the first cause of action, is whether it had notice or reasonable cause to believe that a preference would be effected.

On the issue of notice, I am not going into the same kind of long discussion that I have indulged in as to the question of solvency, which is the principal issue made by the parties at this trial. The evidence relating to notice lends itself to divergent inferences. It suffices to say that I think it would be entirely too strict a rule to apply to a bank or to business men to hold, under the proof, that the bank was put on inquiry. It would be practically impossible to carry on business, or for business men to get accommodations, if the kind of scrutiny which the evidence shows the representatives of the bank made — and of which they made notations in their ez’edit files — -were to be construed as putting them on inquiry as to whether the borrower from them was insolvent. I think the conduct of the bank straight through indicates that not only was it relying chiefly on Mr. Segal and his wife as indorsers, but that it did not, on azialysis of the financial statement furnished by the corporation, regard the corporation as a bad risk for the $1,500 loan. What the bazzk’s officials did say was that the corporation was an undesirable kind of a customer, because it was ezzgaged in a type of business where its assets ran so much into receivables, azzd that such receivables were an undesirable form of security for a bank to have to rely on or to be forced to acqzzire as an asset. I think that is all.

To have a depleted bank account in ordinary times would mean more thazz it has zneant in the past four years, particularly during the last year or two. It is matter of general knowledge that there are plenty of people who have ample assets and who are zzot insolvent, but who are low in cash and have zzot had any money. It is also matter of general knowledge that this condition has prevailed for sevez’al years. I think the nonpayment of small checks drawn on the bank by the corporation must be interpreted in the light of the facts I have mentioned.

Mr. Segal and the representatives of the bank az-e in accord in their statemezzts that there was really nothing to put the bazzk on inquiry that the coz’poration was insolvezzt. If I should hold that there was notice or adequate basis for compelling inquiry, I should have to draw inferences eozztrary to the outright testimony of all the witnesses who know anything about the matter. Those inferences would edge over into speculation or conjecture.

I therefore do not feel that the proof warrants a recovery against the bank on the charge that it was preferred.

So also I think that there was no fraudulent conveyance to the bank. That is settled by Irving Trust Co. v. Chase Nat. Bank (C. C. A.) 65 F.(2d) 409. The bank had no knowledge that an auction had occurred. At the best, the treatment of the bank by its customer can be described only as preferring the bank over its other creditors. Under the facts, the second cause of action comes squarely within the ruling cited and therefore must fail.

Next, with respect to the $1,500 item, in the sense of the bankruptcy statute were Jacob and Elsie Segal preferred?

It is undisputed, Mr. Segal tells us, that throughout the entire period he represented and acted for his wife, Elsie Segal. There is nothing unusual about that. What he knew, she knew. The only inquiry, therefore, is whether the evidence establishes a right of recovery against him; because, if it does, it establishes also a right of recovery against her.

I have already determined that the corporation was insolvent. The situation of the bank with respect to knowledge or reasonable cause to believe is quite different from the situation of Mr. Segal. He was in the ao. tive conduct of the business of the corporation. If the corporation was insolvent, indisputably he knew it. He was not merely put on inquiry. He knew it. If that be so, then the only question under the third cause of action is whether, as indorsers, he and his wife come within the same class as direct creditors. That they do is settled by the Sehleicher Printing Corporation Case (C. C. A.) 62 F.(2d) 503.

Note the wording of the statute. The language is, if “the bankrupt be insolvent and the * * * transfer then operate as a preference, and the person receiving it or to be benefited thereby, or his agent acting therein, shall then have reasonable cause to believe that the enforcement of such * * * transfer would effect a preference, it shall be voidable.” 11 USCA § 96 (b). Here there exists every element of a preference— each element is established by the proof— with respect to the indorsers of the $1,500 note to the bank. The corporation was insolvent. The indorsers knew it was insolvent. The indorsers knew that to pay the bank would effect a preference of the bank over other creditors of the same class. They knew also that by the payment the indorsers would be benefited, in that they would thereby escape having out of their own pockets to pay the bank.

As I see it, therefore, on his own statement both Mr. Jacob Segal and his wife are liable for the $1,500.

There is another ground on which it is plain that Mr. Jacob Segal is liable for the $1,500 item. He was an officer and director of the corporation. An officer and director of a corporation must exercise care in handling its business. It is perfectly clear, it is undisputed, that at the time — that is, when the bank got the $1,500 on February 19, 1932 —the corporation had failed to pay its obligations when due and had failed to pay its written obligations. It had failed to pay obligations of the same kind as promissory notes. At the time it was organized,, the corporation, in writing, had assumed the obligations of the lease. The lease required the payment of rent, and it required the payment of taxes. Both rent and taxes had been in default for a long time prior to February 19, 1932. At that date, also at subsequent dates that are involved, the overdue and unpaid amount of those two items was some five or six thousand dollars. There is proof also that the Webb note owing by the corporation was overdue. I see no occasion, however, to go into that, because it is incontrovertibly shown by the evidence that there was a considerable amount due and owing for rent and taxes under the lease, which the corporation had failed and refused to pay.

The first sentence of section 15 of the Stock Corporation Law (Consol. Laws, c. 59) makes it the duty of the court to set aside the transfer of any property of a corporation to one of its officers or directors, whether the transfer to that officer or director be direct or indirect. It seems to me that, when a transfer is for the personal benefit of the officer or director, through relieving him from liability as indorser, then he comes within the first sentence of the section, and that the sum transferred is recoverable from him. However, I confess that I have found no direct adjudication on the point, and none has been furnished me. It is not really necessary, however, to determine the issue arising under the first sentence, because the second sentence of the section obviously applies.

It is perfectly plain that the transfer of the $1,500 to the bank was made by Mr. Segal. He is the very man who did it. Under the second sentence a transfer by an officer or director “when the corporation is insolvent or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporation” is invalid, “except as to any rights or interests which may be acquired thereunder by any person without notice or reasonable cause to believe that such * * * transfer * * * would effect a preference.” The last clause quoted has no application to the person making the transfer. Rather it applies to the person who gets the preference. Here it is manifest that the very intention of making the payment in full— the very intention of making the auction sale of assets to provide the money with which to pa.y in full — in advance of maturity, was to give the bank a preference and to release the indorsers from further liability.

So, as I see it, there is the additional ground upon which, on the undisputed proof, Mr. Jacob Segal individually is liable if the corporation was in fact insolvent, as I have found it was, at the time of the $1,500 payment to the bank.

Let us turn now to the other item involved in the ease, namely, the accounts receivable assigned to Max Segal.

On the testimony of Jacob Segal himself and on the testimony of Max Segal himself, both of them are liable for those accounts receivable. Their liability is established by the decision of the Supreme Court of the United States in Benedict v. Ratner, 268 U. S. 353, 45 S. Ct. 566, 69 L. Ed. 691. On the facts, as they have been shown without dispute here, there is a precise precedent also in Irving Trust Co. v. Finance Service Co. (C. C. A.) 63 F.(2d) 694. This conclusion cannot be escaped.

What happened in the ease at bar? The transferor — and I am assuming that there was a transfer as claimed by Mr. Jacob Segal and his son — after the transfer continued to collect the assigned accounts receivable. The transferor not only deposited the proceeds of the collections in its own bank, to its own general credit there, but it applied .them to its own uses at will. There was no accountability whatsoever to the transferee. The transferor was left free to handle those accounts and their collection as it saw fit; and it did so. That brings this ease within Benedict v. Ratner.

The writings relating to the assignment did not in terms provide that the proceeds should be used in the way in which they were actually used. Nevertheless, the inference is unavoidable that it was the understanding between the parties that what was done would be done. Mr. Segal and his son both say that the arrangement was left entirely in the father’s hands. The son says that he himself made the collections and turned over the money to the corporation, exactly as he did with the proceeds of his collections of other accounts for the corporation. It also was stated by the witnesses that the original loan of $1,500, alleged to have been made by the son, was reduced to $1,050 through direct pajunents by the corporation, out of its own other funds, preceding the bankruptcy. The conclusion is therefore inescapable that domination and control of the accounts alleged to have been assigned to the son were left to the corporation.

Was there a preference by the transfer?

Assuming again that the transfer was made to Max Segal and assuming that the money advanced to the corporation belonged to him, the testimony of the same two gentlemen is that the father acted throughout for the son. Whatever the father knew, the son knew. We are not concerned with what happened back in December, 1931. Under the pleadings what is sought to be set aside is a transfer of accounts receivable made in March, 1932. I have already found that the corporation was insolvent from February 19 on to the filing of the bankruptcy petition; also that Jacob 'Segal, who was conducting the corporation, then knew that it was insolvent. If there be even doubt as to the extent of his knowledge, he was certainly put on inquiry as to whether it was insolvent, and he surely would have learned that it was insolvent if he had pursued the inquiry. Some $3,000 of receivables were transferred by the corporation. For what was owing, or claimed to have been owing, to Max Segal something in excess of $900 has been collected, and there is an unascertained amount of the securities still held by him. It is clear, therefore, that, if he was a creditor, a preference was effected.

As I see it, it does not make any difference what happened back in December, 1931, because the transfer under inquiry was made in March, 1932, a portion on March 3 and a portion on March 12. It was the condition of the corporation in March, 1932, in which we are interested, for the reason, that it was not until then that the transfer of the accounts receivable occurred. Even though it were conceded that the transfer of the Moose account on December 22,1931, was valid, that is no justification of or excuse for, nor does it render valid, the transfer in March, 1932, of other property. It is this other property, a portion of it transferred on March 3 and a portion on March 12, that is under consideration now. Moreover, it is pretty plain that at the time of the transfer of the new accounts receivable in March the Moose collateral had become entirely worthless.

I see no occasion to go into the questions of whether or not originally there was an assignment of the Moose collateral or whether or not the $1,500, which the father himself turned over to the corporation on December 22, 1931, was a loan made by him on behalf of his son. The answer of either question favorably to defendants’ contention would not make the slightest difference in the result.

Certainly, to say the best of it, the book entries are confusing. I do not for a moment mistrust the young woman bookkeeper. Clearly, however, she made the book entries and she drew the papers-under instructions. She was not a principal in any of these matters. The instructions must have come from Jacob Segal, and it is most extraordinary that the loan is entered in the books as made by him.

There is another fact about the books to which I should call your attention. It is most curious that there ever should have been an entry on March 3, 1932, of a loan from Max Segal. As Miss Cohen explained the system of bookkeeping, the entry did not belong at all in the book where it is found. Under the practice, the bills payable book should not carry the loan of Max Segal any more than it should carry- — and it did not carry the loans from the Finance Service Company. Yet the Max Segal loan is stuck in there as having been made on March 3. The bookkeeper did not put in any loan by him on December 22. Yet when March 3 rolled around she recorded in this book the loan of Max Segal.

Again, the assignment of the Moose collateral has not been produced. As I understand, all the papers of the bankrupt corporation were turned over to the trustee and all the counsel for Mr. Segal could do at this stage was to call on the trustee to produce them; but the trustee has not produced them, and the trustee’s counsel says the trustee never had them. This situation raises a question,. under several decisions of the Supreme Court of the United States, as to what significance is to be attached to silence. You will find the discussion of the subject very interesting in Bilokumsky v. Tod, 263 U. S. 149, 44 S. Ct. 54, 68 L. Ed. 221, by Mr. Justice Brandeis, and in Mammoth Oil Co. v. United States, 275 U. S. 13, 48 S. Ct. 1, 72 L. Ed. 137, by Mr. Justice Butler.

As I have heretofore indicated, there are some puzzling things in the testimony about the loan and about the Moose collateral. Who really made the loan in December? Was it the father or was it the son? What has become of the documents covering assignment of the Moose account? Were the transfers to Max Segal in March, 1932, new, or was there a substitution then of other accounts in the place of the surrendered Moose account? I am glad that there is no need for me to determine whether the $1,500, which the corporation received on December 22, belonged to the father or to the son or whether actually there was an assignment of the Moose collateral to Max Segal in December, 1931.

,As I have said with respect to the $1,500 item, so I say with respect to the accounts receivable item, that all the elements of a case under section 15 of the Stock Corporation Law are made out as against Jacob Segal.

The result is as follows:

First, the bill must be dismissed as against the .bank.

Second, the trustee is entitled to recover from Jacob Segal $2,414.94, with interest on $1,500 from February 19,1932, and on $793.94 from May 24,1933, and $121.50 from January 2, 1934.

Third, the trustee is entitled to a recovery from Elsie Segal of $1,500, with interest from February 19, 1932.

Fourth, the trustee is entitled to recover from Max Segal $914.94, with interest on $793.94 from May 24, 1933, and on $121.50 from January 2, 1934.

Fifth, Max Segal will be required to re-transfer to the trustee all accounts receivable, included in the assignments from the corporation to him, which remained uncollected at January 2, 1934, together with any collections thereon he may have made since that date.

Sixth, the amounts covered by the third and fourth paragraphs are the same as the corresponding sums covered by the second paragraph, and the trustee is entitled to but one satisfaction, from whomsoever it comes, of the total amount of $2,414.94, with interest as stated.

Settle decree on three days’ notice.


source: Caselaw Access Project

author: NIELDS, District Judge.

license: Public Domain

text:
    CHICAGO FLEXIBLE SHAFT CO. v. KATZ DRUG CO.
    No. 1048.
    District Court, D. Delaware.
    Feb. 23, 1934.
    John M. Zane (of Zane, Morse, Zimmerman & Norman), of Chicago, Ill., and Hugh M. Morris, of Wilmington, Del., for plaintiff.
    Robert H. Richards, of Wilmington, Del., and Paul Stinson and Arthur Mag (of Ryland, Stinson, Mag & Thomson), both of Kansas City, Mo., for defendant.
   NIELDS, District Judge.

This motion for a preliminary injunction was beard upon bill and affidavits filed by each side. After the bearing, defendant filed its answer.

Plaintiff is a manufacturer of electrical appliances which it ships from its factory in Chicago to jobbers in the principal cities of the United States who in turn sell them to retailers. By its merchandising methods plaintiff parts with title to its products when it sells them to jobbers and in turn jobbers part with title when they sell to retailers. Articles sold by plaintiff include a kitchen electrical appliance for preparing food and drink designated by the trade-mark “Mix-master.” Pursuant to a long established business policy plaintiff has attempted to fix the retail price of Mixmasters by selling to jobbers who promise to sell only to retailers maintaining the fixed price. Before September 10, 1933, the retail price fixed by plaintiff for Mixmasters was $19.50 per article. Thereafter the price fixed by plaintiff was $21. The price structure attempted to be imposed upon the trade by plaintiff was: Jobbers $10.50, retail dealers about $12.60; the public $21. Thus plaintiff includes a profit load of 100 per cent, between its price to jobbers and the price to the consuming public.

Defendant operates a chain of cut-rate drug stores; five in Kansas City, Mo., and one in each of the following cities: Kansas City, Kan.; St. Joseph, Mo.; and Des Moines, Iowa. It sells at cut-rate prices drugs and sundries, including electrical appliances for the home such as Mixmasters. For twenty years defendant has been selling at cut-rate prices, but at prices which afford a fair profit because of the large volume of sales. By extensive advertising defendant has a widespread reputation as a retail seller at cut-rate prices.

Defendant’s conduct, complained of by plaintiff, occurred in the fall of 1933, but more particularly during the week beginning December 3d. Earlier, in August defendant negotiated with a jobber for a quantity of Mixmasters but was told plaintiff forbade the sale to defendant. In September and October defendant purchased Mixmasters at a cost slightly over $11 and sold them at $14.98. In the Sunday editions of the Kansas City Star through October and November defendant advertised "Sunbeam Portable Electric Mix-master” at $1498. In the issue of October 15th defendant incorrectly advertised Mix-masters as the “Newest 1934 Model,” but on the following Sunday changed the advertisement to “Newest 1933 Model.” In the November advertisements defendant puffed sales with such phrases as “Latest Model,” “Nationally Famous Portable Electric Mixmaster,” “Million Dollar Sale,” “Katz Anniversary 'Gift Price’ to Housewives!” etc. In the issue of November 17th defendant advertised an auction and included a Mixmaster in the list of “a few of the 15,000 items that will be auctioned off.” The bill avers the auction was held December 2, 1933; was attended by many thousands and that defendant announced the items auctioned off had been donated to it.

The advertising above and cut-rate selling of Mixmasters apparently wounded plaintiff’s feelings. So plaintiff mailed a form letter dated December 3, 1933, to Mixmaster retail dealers in the trade territory served by defendant. It was headed “Special Urgent Notice” and began, “Katz Drug Company in Kansas City have been advertising Mixmaster in the Sunday newspapers at $14.98. We do not sell Katz Drug Company, nor will we sell them. Nor will we sell a distributor, if we can find out that he sells Katz.” Plaintiff urged retailers to institute a price war against defendant and agreed to pay the cost of the warfare. The form letter continued:

“Now
“To enable you to combat this insufferable competition against your regular selling price, please consider this as your authority to advertise by posters in your window, folders or newspapers, a price $1.09 below any price for Mixmasters Katz Drug Company may advertise, either in the newspapers or by circular, for one week immediately after the appearance of any such Katz advertisement or circular.
“We have arranged with your jobber that wherever you are obliged to make this cut in price you may send a copy of your sales ticket to the jobber from whom you purchase Mixmasters and he will issue you a credit on such sales so as to leave you a margin of 25 percent.
“We do not propose to have our Mixmaster sales by our legitimate dealers wrecked in this way if we can prevent it.
“So let the Katz Drug Company do the advertising, and you make the sales, if they like that sort of thing.
“Chicago Flexible Shaft Company.”

Accordingly, in the Kansas City Star for Monday, December 4th, plaintiff caused to be published an advertisement offering “The Famous Sunbeam Mixmaster — Portable— Latest Model — Regularly Sells for $21 — This Week $13.95.” The following day, defendant countered by advertising in the Kansas City Times for Tuesday, December 5th, “Katz— Headquarters for The Famous Sunbeam Mix-master — Portable—Latest Model — Regularly Sells for $21 — now Katz Stores only — $12.-98.” On the same day, plaintiff caused to be published in the Star an advertisement offering “The Famous Sunbeam Mixmaster— Portable — Latest Model — Regularly Sells for .,$21 — Balance of this Week $11.98.” The next day, defendant advertised in the Star for Wednesday, December 6th, “Headquarters for the Famous Sunbeam Mixmaster — Portable —Latest Model — Regularly Sells for $21— Katz Super Special — $11.48.” The day following, plaintiff caused to be published in the Kansas City Times for Thursday, December 7th, an advertisement offering “The Famous Sunbeam Mixmaster — Portable—Latest Model — Regularly Sells for $21 — Balance of this Week $10.98.” Next day, defendant advertised in the Star for Friday, December 8th, “Headquarters for the Famous Sunbeam Mix-master — Portable—Latest Model — Regularly Sells for $21.99 — at Katz Deep Cut Prices.” Plaintiff alleges in its bill that the depth of this cut by defendant was $9.98. At this point plaintiff desisted from further price cutting having forced defendant, as it alleges, to sell below cost.

It appears that during a part of Friday, December 8th, defendant sold 15 Mixmasters at $9.98. Although plaintiff precipitated this price drop, it complains that defendant in selling these 15 articles at $9.98 violated article VIII of the Retail Drug Code because that price was below cost to defendant. While the price of $9.98 was lower than some of defendant’s previous purchases, nevertheless, when this small number was sold the price was above replacement cost to defendant. December 7th defendant had entered into contracts enabling it to purchase Mix-masters at $9.50 and $9.23 and under those contracts 36 Mixmasters had been delivered to defendant. It follows that defendant did not sell below cost when it advertised sales at $9.98 and did not violate article VIII of the Retail Drug Code. In any event such violation would be a matter of immediate concern to the United States. Purvis et al. v. Bazemore (D. C.) 5 F. Supp. 230. In the succeeding week defendant published in the Star an advertisement offering Mixmasters at $14.98 and thereafter substantially adhered to that price.

In its bill of complaint plaintiff charges that defendant formed a plan or design maliciously and unlawfully to injure the business and good will of the plaintiff and to carry on unfair competition with plaintiff by purchasing Mixmasters and advertising and selling them at greatly reduced prices and thus to cause jobbers to believe that plaintiff had sold Mixmasters directly to defendant and had co-operated with defendant in sales at such prices and thereby to cause jobbers and retailers to decline to deal in Mixmasters and to cause them to cancel orders with plaintiff and to destroy the business and sale of Mix-masters. Plaintiff further alleges that, in pursuance of said plan or design, defendant purchased a number of Mixmasters, published the advertisements complained of, and auctioned off a Mixmaster.

In the proof I find no evidence whatever that defendant formed or carried out such a plan or design. I find no evidence that defendant carried out any malicious or unlawful plan or design against plaintiff’s business or represented, in advertising Mixmasters, that plaintiff granted to defendant authority to advertise and sell Mixmasters. On the contrary, I find that defendant purchased a number of Mixmasters and thereafter sold them at a profit in the usual and ordinary course of its business and in accordance with its long established practice of selling at cut-rate prices but without any malice toward plaintiff and without any intent to injure plaintiff’s business. The only departure from this normal course of business was the cut-rate war during the- week of December 3d herein described.

Defendant has the right to sell Mix-masters, which it buys outright, at a reasonable profit to itself, even though the prices paid are less than the price at which plaintiff is striving to maintain all retail sales. To restrain defendant, either temporarily or permanently, from selling plaintiff’s product at less than $21 per article, would destroy that right of defendant. A manufacturer, who has sold his product outright, may not by contract with his purchaser, or by co-operative methods, or by confederation with others, dictate and maintain a fixed retail price. Such contracts and such practices are unfair competition, are in restraint of trade, and are contrary to public policy. Dr. Miles Medical Co. v. Park & Sons Co., 220 U. S. 373, 31 S. Ct. 376, 55 L. Ed. 502; Federal Trade Comm. v. Beech-Nut Co., 257 U. S. 441, 42 S. Ct. 150, 60 L. Ed. 307, 19 A. L. R. 882. Plaintiff’s bill of complaint and the unchallenged facts in this record disclose a systematic infraction of the policy of the law against restraints of trade and of free competition.

It is apparent that the ultimate relief prayed for will be refused and, therefore, a preliminary injunction should not issue.

The motion for a preliminary injunction will be denied.


author: DAWSON, District Judge.

text:
    LOUISVILLE CREDIT MEN’S ADJUSTMENT BUREAU v. UNITED STATES.
    District Court, W. D. Kentucky.
    Feb. 13, 1934.
    Woodward, Hamilton & Hobson, of Louisville, Ky., for plaintiff.
    T. J. Sparks, U. S. Atty., of Louisville, Ky., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and L. H. Baylies, Atty., Bureau of Internal Revenue, both of Washington, D. C., for the United States.
   DAWSON, District Judge.

This is a suit for the refund of federal income taxes exacted of the plaintiff for each of the taxpayer’s fiscal years ended April 30, 1926, to April 30, 1929, both inclusive. A somewhat detailed statement of the pertinent facts is deemed essential to a proper understanding and correct decision of the case.

The plaintiff, which will be called the bureau, was incorporated in 1907 with an authorized capital stock of 400 shares of the par value of $10 per share. Prior to 19221 only 180 shares had been issued, and in that year and prior to April 30th, 20 additional shares were issued. Since that date no additional shares have been issued.

Tbe articles of incorporation provide that no stockholder may own more than 30 shares, and that all stockholders must be members of or persons connected with tbe Louisville Credit Men’s Association, which is a nonprofit Kentucky corporation without capital stock, organized in 1902, and whose membership is composed of wholesalers, jobbers, manufacturers, and factories located in Louisville, Ky., and its vicinity. Tbe articles of incorporation of this .association declare: “The corporation will not carry on any business, but tbe objects or purposes to be transacted shall be all lawful and honorable measures for protecting manufacturers and wholesale dealers who sell on credit against needless losses, either by the dishonesty of their debtors or by unjust laws or practices.”

Since its organization, in strict compliance with its articles of incorporation, it has not conducted any business, but has operated as a clearing bouse for credit information for its members and for the members of the National Association of Credit Men, with which it is affiliated, and for the members of other local credit men’s associations affiliated with the National Association, and for the purpose of improving credit conditions generally. The only revenues the association receives, other than contributions from tbe bureau, are from the annual dues of members, and no dividends or other payments have ever been paid by the association to its members, and by the terms of its articles of incorporation no such dividends can be paid. On the other hand, the articles of incorporation of the bureau are frankly those of an ordinary business corporation. The articles, in part, declare:

“The nature and objects of the business will be the investigating or causing to be investigated, tbe financial condition of mercantile or other establishments, whether conducted by individuals, co-partnerships or corporations; to prevent loss on accounts against failing, insolvent or fraudulent debtors, as far as may be possible; to arrange for taking over stocks of merchandise and other property of debtors, whether real, personal or mixed by bill of sale, deed or otherwise, or acquiring a lien thereon, and tbe holding- and disposing of the same for the benefit of creditors when the same may be deemed advisable; to secure concerted action in the nomination and election of efficient and trustworthy assignees, receivers, trustees in bankruptcy and other fiduciaries; to effect collections and transact such other business as may be germane to its objects and purposes; and to exercise such corporate powers as are usual and incident to business corporations.”

From the date of its organization the bureau has engaged in all of the activities authorized by its charter, including the collection of delinquent accounts, administering insolvent estates, filing and attending to bankruptey claims, and such other business as is generally conducted by its individual and corporate competitors. These services are rendered to its stockholders, to members of the Louisville Credit Men’s Association, to members of the National Association of Credit Men, and of its affiliates, and to nonmembers of these organizations. IVith some exceptions, not necessary here to mention, the bureau makes such charges for these services as to yield a profit, and it has always operated at a profit, and prior to 1925 contributed part of this profit to the support of the Louisville Credit Men’s Association, which, prior to that date, was not self-sustaining.

The gross income of the bureau for the fiscal year ended April 30, 1918, was $11,172, and its net income $2,092, and at the end of that fiscal year it had a surplus of $3,244. For its fiscal year ended April 30, 1926, its gross income was $28,351, its net income $7,-383, and its surplus $12,529. For the fiscal year ended April 30, 1927, its gross income was $40,767, its net income $16,373, and its surplus $25,951. For its fiscal year ended April 30, 1928, its gross income was $43,202, its net income $12,256, and its surplus $38,-207. For its fiscal year ended April 30,1929, its gross income was $52,872, its net income $15,071, and its accumulated surplus $48,164; while for its fiscal year ended April 30,1930, its gross income was $59,916, its net income $18,502, and its accumulated surplus $66,796. The accumulated surplus represented, in large part, the net earnings of the bureau from its business activities authorized by its charter, after deducting a 10 per cent, dividend for each of the fiscal years ended April 30, 1918, to April 30, 1922, both inclusive, 175 per cent, dividend on February 1,1923, donations to the Louisville Credit Men’s Association of over $17,000 between 1918 and 1925, and taxes, including those sought to he recovered in this action.

The relations between the bureau and the Louisville Credit Men’s Association from the beginning have been very intimate. They operate in the same suite of offices, many of the employees of the two companies being the same, each contributing on an agreed basis to the payment of their salaries. They have the same general manager, and the president of the association is always a member of the board of directors of the bureau. The business transacted by the plaintiff has, in large part, come to it from its stockholders, from the members of the Louisville Credit Men’s Association, from members of the National Association of Credit Men and of its affiliated credit associations, and largely, if not solely, by reason of its connection with these credit associations.

Shortly prior to January 10, 1923, the officials of the National Association of Credit Men notified the bureau that if it wished to continue its close affiliation with the National Association and its affiliates, it must discontinue its policy of paying dividends to its stockholders. To meet this demand of the association, the hoard of directors of the bureau on January 10,1923, amended the by-laws of the corporation. One of these amendments provided: “The corporation shall not operate for the profit of stockholders and no dividend shall be paid to stockholders under any circumstances; and any profits or earnings of the Bureau, not necessary for its successful operation, shall go to the L-ouisville Credit Men’s Association.”

Other amendments to the by-laws vest in the board of directors of the bureau power to determine the amount of surplus to be retained by the corporation for the operation of its business, and make provision for an annual audit and for furnishing a copy of such audit to the National Association of Credit Men. The board went on record at this meeting as desiring to meet all the requirements of the National Association, and approved the form of an agreement to he executed by the stockholders of the bureau, by which such stockholders agreed to place their stock in the hands of three trustees “* * * for the sole benefit of the Louisville Credit Men’s Association, to he voted and possessed by said trustees for and during the period of ten years from and after January 1, 1923, and at the expiration of said voting trust all assets of the Bureau to be turned over to the Louisville Credit Men’s Association.”

The proposed trust agreement recited that it was executed to meet the policy of the National Association of Credit Men and of the Louisville Credit Men’s Association not to co-operate with any adjustment bureau which paid dividends. Provision is made in the agreement for the president of the Louisville Credit Men’s Association to fill any vacancies occurring in the trustee membership, and that the agreement may he terminated at any time by the unanimous consent of the signers. Two other very pertinent provisions of the trust agreement are as follows:

“(3) Each of the parties hereby agrees that if during said period of ten years either desires to sell or dispose of his shares of stock he will give notice in writing of such desire to each of the trustees, whereupon said trustees shall jointly have the option and right to purchase the same within ten days after receipt of such notice for a price equal to the book value thereof at the time said notice is given, to-wit; that the proportionate value of the net assets of said corporation which the number of shares proposed to be sold bears to the entire issue of capital stock of said corporation but in determining the value nothing shall be included for good will and the property of the corporation shall be valued at its true value in money.
“(4) Any and all stock purchased under the provision of this agreement by the trustees shall be offered by them to the subscribers hereto at. the purchase price thereof, it being the intent of this agreement to permit the signers hereto to acquire and hold by the trustees aforesaid the stock of any certificate holder who might insist on selling his stock.”

This agreement was duly signed 'by the ¡owners of all the outstanding stock of the bureau, except by the holder of one share, and since its execution no dividends have been paid to the stockholders.

Under these facts the plaintiff contends that it was and is a business league within the meaning of the applicable provisions of the Revenue Acts of 1926 and 1928, and exempt from income taxation under these statutes. The pertinent provisions of the two acts follow:

Revenue Act of 1926 :

“Sec. 231. The following organizations shall be exempt. from taxation under this chapter (Title III, Income Tax) — * * *
“(7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual.” 26 USCA § 982 (7).

Revenue Act of 1928:

“Sec. 103. The following organizations shall be exempt from taxation under this title (Title I, Income Tax)— * * *
“(7) Business leagues, chambers of commerce, real estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual.” 26 USCA § 2103 (7).

Admittedly, plaintiff is neither a chamber of commerce, a real estate board, nor a board of trade, as these organizations are commonly understood and as these terms are used in the acts; but it is earnestly insisted that it is a “business league not organized for profit, and no part of the net earnings of which inures to the benefit of any private stockholder or individual,” within the meaning of the two Acts.

I cannot agree with this contention. It is quite clear that Congress, in addition to exempting from taxation the familiar chambers of commerce, boards of trade, and real estate boards, felt that there were other semi-public trade organizations performing a similar service which should be exempted, and,, in searching for an all-embracing term by which such organizations might be designated, selected the words “business leagues” as a description of this class of organization, and in order to determine if a particular organization or corporation is embraced within this description it would seem to be a safe guide to see if such concern performs substantially the same functions as are customarily per- ■ formed by boards of trade, chambers of commerce, or real estate boards. Chambers of commerce, boards of trade, and real estate boards in their respective fields all perform a function well known to the modern business world. They are not business concerns, in the sense that they operate for profit or render that individual paid service to the public, or even to their own members, that is customarily performed by individuals or organizations for the purpose of making money. Their function is a semi-eivie one, having to do in large part with the general welfare of the business or businesses represented by their membership. In no sense are they individual business organizations operating for profit. Any surplus revenue realized over and above the actual cost of operation is the incidental, not the intended and planned, result of their operations. The revenues of such organizations are ordinarily obtained from membership dues — not from fixed charges for services rendered.

The plaintiff in this case meets none of these tests. Its charter is that of the ordinary private commercial corporation. It has capital stock. This stock has a par value. Under its charter the stock is entitled to dividends, if earned, and prior to 1923 dividends were earned and paid, and have been regularly earned since that date, but not distributed. It does not depend upon dues for its revenue. No dues are charged. The business in which it is engaged is that quite extensively engaged in by others for profit, and its earnings are acquired in exactly the same way as are the earnings of its competitors. To hold that Congress intended to exempt such an organization from taxation while taxing its individual and corporate competitors would convict the legislative department of deliberate and unjust discrimination.

If we disregard the test of analogous activities, and measure the rights of the plaintiff by the plain language of the acts, it seems to me we must reject plaintiff’s claim. To entitle a business league to exemption two conjunctive requirements must be met: First, it must not be organized for profit; and, second, no part of its net earnings must inure to the benefit of any private shareholder or individual. If it fails to meet both of these tests, it is not exempt. It was undoubtedly organized for profit, and it has continuously operated for profit, and has actually realized a profit every year of its operation. Its charges for services have always been fixed with the idea of realizing a profit. This alone would seem, under the language of the two statutes, to require the rejection of plaintiff’s claim. Admittedly, prior to 1923 the net profits inured to the benefit of its stockholders, both in the form of dividends distributed and in the increase of their equity in the mounting surplus. Indeed, the corporate charter puts this fact beyond question.

It may well be doubted if, under the two revenue acts in question, a corporation possessing the corporate powers of the plaintiff, and conducting its business as has plaintiff, may, by a mere by-law eschewing profits and a contract of its stockholders among themselves, designed to carry such a by-law into effect, without a corresponding change in the corporate charter, transform a taxable corporation into an exempt one; but in any event it seems clear to me that no such result was attained by the plaintiff through the amended by-laws of January 10, 1923, and the trust agreement of the stockholders heretofore referred to.

As heretofore noted, one of the necessary requirements for exemption is that the corporation or business league be one not organized for profit. The statutes do not exempt a corporation merely because it is not organized or operated for the profit of its stockholders. If it is organized for profit, it is not exempt even though the profits are not for the stockholders, but solely for the corporation as such, or for some other person or organization. The by-laws of 1923 merely declare that the corporation shall not be operated for the profit of the stockholders, and that no dividends shall he paid to the stockholders. There is no change in the legal character of the corporation, nor in its authority to conduct its business for profit. As a matter of fact, it continued to. operate for profit and continued to make even greater profits than formerly and to pile up a fast growing surplus. Furthermore, the trust agreement is careful not to waive the rights of the stockholders to their equity in the surplus and other assets of the bureau, during the life of the agreement. On the eve of the execution of the trust agreement they distributed to themselves, through a dividend of 175 per cent., practically all the corporate assets then on hand, and by the terms of the agreement any stockholder was given the right to sell his stock, with the option to his associates to buy it for its book value, and the' trust agreement at any time could be annulled by the unanimous consent of its signers. With these rights reserved to the stockholders, there can be no doubt that the net earnings of the bureau which found their way into surplus inured to the benefit of the stockholders during the life of the trust agreement, which, so far as the record discloses, was in full force during each of the years here involved. This fact, it seems to me, prevents the plaintiff from meeting the second requirement of the statute that no part of the net earnings shall inure to the benefit of private shareholders.

The trust agreement provides that at its termination all assets of the bureau shall be turned over to the Louisville Credit Men’s Association, but this was certainly not binding on the nonsigning member. ' If binding on the others, it did not prevent them from selling their stock before the expiration of the trust agreement and thus getting the benefit of the net earnings which had at that time been carried to surplus. Furthermore, assuming that any of the net earnings not necessary for the business of the bureau were, as the amended by-laws of 1923 authorized, turned over to the Louisville Credit Men’s Association (and between 1923 and 1925 some of the net earnings were so turned over), to this extent the net earnings of the bureau would seem to inure to the benefit of a private individual. I think it fair and reasonable to construe the words “private individual,” as-used in the two statutes, as broad enough to embrace private corporations, as well as natural persons. By the same token, to the extent that any net earnings were on hand as surplus at the expiration of the trust agreement and turned over to the association, as the agreement undertakes to provide, such net earnings would inure to the benefit of a private individual.

In view of all these considerations, I feel constrained to hold that plaintiff was not exempt under the statutes relied upon. I am fortified in the conclusion here reached by the uniform definition given by the commissioner to the words “business league” and by the cases of Uniform Printing & Supply Co. v. Commissioner, 33 F.(2d) 445 (C. C. A. 7th Cir.), affirming the Board of Tax Appeals; Northwestern Jobbers Credit Bureau v. Commissioner, 37 F.(2d) 880 (C. C. A. 8th Cir.), affirming the Board of Tax Appeals (14 B. T. A. 362); and by the decision of the Board of Tax Appeals in the appeal of Adjustment Bureau of St. Louis Association of Credit Men v. Commissioner, 21 B. T. A. 232.

A finding of facts and judgment conforming to the views herein expressed may be prepared by counsel for the United States, and, after submitting same to counsel for the plaintiff, tendered for entry.


author: LINDLEY, Judge.

text:
    MESSICK v. RARDIN.
    No. 625.
    District Court, E. D. Illinois.
    March 6, 1934.
    Walter T. Gunn, of Danville, Ill., for plaintiff.
    T. N. Cofer, of Charleston, Ill., for defendant.
   LINDLEY, Judge.

Plaintiff sues to have certain government bonds held by defendant delivered to- her as her property. Defendant, conservator of the National Trust Bank of Charleston, asserts that the bonds do not belong to plaintiff, but that they are the property of the hank.

On March 1, 1933, H. H. Messiek, husband of plaintiff, had on general deposit with the hank $7,184-.67. This balance remained substantially the same from day to day until March 4, 1933, when it was $7,205.97. Upon .this account plaintiff had authority to draw. During all the same period plaintiff had a checking account of $35.95. Plaintiff and her husband, during said period, were the holders of a certificate of deposit issued by said bank April 8, 1932, for $5,000, payable on 30 days’ notice “to either of them or the survivor,” with interest at 3 per cent, per annum.

On March 3, 1933, plaintiff filed with the bank a 'written order to it to buy for her through the Federal Reserve Bank $3,500 in, 3%, 46 — 49 Treasury bonds, agreeing not to hold the bank liable for purchase or delivery thereof. On the same day the bank ordered the bonds of the Federal Reserve Bank, which institution on Mareh 2d purchased them for $3,405.57 and thereupon charged their cost to the account of the ordering bank and shipped them to the bank in Charleston. The bonds were delivered to the bank by mail on Monday, Mareh 6, 1933. They had reached Charleston on Saturday, Mareh 4th, but no mail delivery was made that day after such arrival. Advice of purchase and terms thereof had been mailed to the bank on Mareh 2d and received by it on Mareh 3d.

The bank closed under the bank moratorium Mareh 4, 1933, and never reopened. The conservator’s title date from March 28th. None of the deposits named has been paid or debited in any amount or any manner. Plaintiff has demanded the bonds and on May 8, 1933, wrote the comptroller claiming them and calling attention to the facts as she understood them. She said that when the bonds arrived there was sufficient money on hand to pay for them;' that the bank failed to notify her of their arrival; that she had agreed to pay for them as previously, upon arrival or notification of purchase, as she did not and could not know the exact amount of the purchase price until notice thereof should come from the bank; and that previously upon notification of similar purchases, she had immediately gone to the bank and paid for them.

Plaintiff testified that when she placed the order she said she would Settle as previously and that upon four or five similar occasions in the past, the bank had notified her of confirmation or arrival and she had at once settled from money on deposit.

It is plaintiff’s theory that the bank acted as her agent and bought the bonds for her as such agent and that the securities are her property in equity, the purchase price of which should be charged against the accounts aforesaid. Defendant contends that the bonds are the property of the bank, never settled for by plaintiff, and that the bank was not bound to charge the purchase price of the bonds against the deposits and in fact could not legally do so.

It is clear that the bank bought the bonds, acquired title thereto, from the Federal Reserve Bank and that it paid therefor with its own funds. But in doing this it was acting under specific instructions from plaintiff so to do. She ordered the bonds, directed the bank to buy the same for her, and agreed to settle therefor as she had previously done, by payment from the deposit upon which she had a right to draw. Clearly, therefore, the bank, in doing all that it did, was acting for plaintiff — was her agent.

Where, then, was the equitable title to these' bonds It is universally the law that where an agent acquires title to property for his principal, he holds the same in equity for that principal. Good faith, essential to equity, so demands. Thus in Follansbe v. Kilbreth, 17 Ill. 522, 65 Am. Dec. 691, where the agent had purchased property in his own name for his principal, the court said: “The complainants acquired an equitable title to the premises the moment the purchase was made, which was at the time subject to all the incidents attaching to such an estate.” Equity does not permit a person agreeing to act for another to deal in his business of agency for his own benefit, and, if he takes in his own name a conveyance of an estate which he has agreed to purchase for another, he will, in equity, be considered as holding the estate in trust for his principal. Switzer v. Skiles, 3 Gilman (Ill.) 529, 44 Am. Dee. 723, and 21 Ruling Case Law 830.

Obviously in such situation before the principal’s title becomes perfected as against the agent, the former owes the duty to the latter to reimburse him for all liability he has incurred for the principal’s benefit. In other words, he must repay to agent the cost of what has been purchased. Thus in 21 R. C. L. 834, § 17, it is said that:

“As a general rule where one is employed or directed by another to do an act in his behalf, the law implies the promise or indemnity by the principal for damages resulting to the agent proximately from the execution of the agency, and for necessary expenses advanced or incurred by the agent in order to consummate that which he is directed to do.”

So here plaintiff was bound from the time she ordered the bonds to reimburse her agent, the bank, for what it should pay for the securities and for its expenses incurred in carrying out its principal’s order. Then and at all times thereafter, she had with the bank a credit of over $7,000, in the form of a deposit upon -which, as the bank knew, she had a right to draw and a further credit of $5,000 in the form of a certificate of deposit for $5,000 payable either to her or her husband. Upon similar previous occasions she had settled by drawing against the deposit credit. In this instance, she did not do so, because, as she says, the bank did not notify her of the completion of the purchase and of the contemporaneous ascertainment of the exact amount of the purchase price, until after the bank closed its doors. After the latter event occurred, the rights of the parties could not be modified; they were fixed as of that date.

Under well-recognized rules in equity controlling set-off, the bank then had the right to reimburse itself by charging to either the deposit account or the certificate of deposit the amount of the purchase price.

A court of equity has inherent power to allow or compel a set-off. This power is independent of statutes allowing a set-off; it was recognized and exercised prior to the enactment of such statutes; and it has not been taken away by their enactment, nor affected by their repeal. 57 Corpus Juris 361.

Speaking otherwise, there is a natural equity that cross-demands should be offset against each other, and that the balance only should be recovered. Hurlbert v. Pacific Ins. Co., 12 F. Cas. 1009, No. 6,919, 2 Sumn. 471. This is particularly true where insolvency intervenes. Goodwin v. Kaney, 49 Conn. 563.

This doctrine is extended to the rule that on a joint and several demand where both or either of two may recover, a set-off or counterclaim consisting of a demand in favor of defendant against the two plaintiffs suing jointly or against either one of them may, if otherwise without objection, be interposed. It is equally true that in an action on a joint and several demand against one obligor, a payment made by the co-obligor on account of or in part payment of the obligation may be pleaded as a set-off. In other words, a demand that is joint and several may be set off or counterclaimed against a separate demand. Mitchell v. Gibbes, 2 Bay (2 S. C. L.) 475; Pate v. Gray, 18 F. Cas. 1291, No. 10,794a; Griswold v. Morrison, 53 Cal. App. 93, 200 P. 62; Hayden v. Alton Nat. Bank, 20 Ill. App. 458; Donelson v. Colerain, 4 Metc. (Mass.) 430; Steele v. Sellman, 79 Md. 1, 28 A. 811; Read v. Jeffries, 16 Kan. 534; Moody v. Willis, 41 Miss. 347. The reasoning of Gray v. Rollo, 18 Wall. 629, 21 L. Ed. 927, relied upon by defendant is in accord with what has been said as is that also of In re Carrier (D. C.) 39 F. 193, 198.

Here the demand against the bank was vested in plaintiff or her husband. There were no limitations upon her legal right to withdraw any or all of the fund at any time prior to insolvency. When the bank closed, the right of the parties being fixed, the demand of the bank against her, therefore, should in equity be set off against her demand against it. To the court, it seems that such is only equity.

The present case partakes of the elements of a prayer for specific performance. It is evident that both the plaintiff and the bank looked to payment for the bonds out of the deposit. Such had been the course of action previously, and it was agreed by the parties that such previous course of dealing should be followed. The bank having closed, therefore, and the bonds having come into the bank’s possession, it is only equitable to complete the transaction by compelling the bank to turn over the bonds and take payment for the same out of the demands existing in plaintiff’s favor against it.

The case of Davis v. McNair, 48 F.(2d) 494 (C. C. A. 5) is illuminating. The trial court there dismissed a bill in equity which averred that the plaintiff on July 8th had on deposit in the bank over $35,000. On that day he directed the bank to buy for him $35,000 worth of Liberty bonds and offered to pay for same out of his account, but was informed that the bank would purchase the bonds and charge his account with same. The bonds were purchased in New York July 23d. On July 24th the bank closed. The next day a receiver was appointed. The court of review held that the bank’s undertaking to purchase bonds in effect changed the debtor-creditor relationship into one of fiduciary character, and that the bank had a right to apply the deposit on the purchase price prior to its insolvency. In equity the bank was treated as having received payment for the bonds. There the court went so far as to extend title of plaintiff to the deposit, inasmuch as the bonds were still held in New York subject to lien for payment.

The facts of the present ease do not require us to go to the extent to which the Court of Appeals extended the doctrine in the case cited. Here the bonds had been received and were held by the bank without lien in any third party, subject to plaintiff’s order. Consequently, under the previous course of dealing, it was the bank’s duty to charge the same against the deposit and a court of equity will effectuate this result.

In recognition of its right to set off demands in its favor against deposits, the bank here continued, after the moratorium became effective, to charge such accounts with such demands as bad cheeks, previously cashed but returned to the bank as uncollectible. Had the securities purchased fallen in market value to l/10th of their cost, the bank, entitled to reimbursement for its outlay, would have had the same right to charge the deposit account with the full amount of the purchase price. In other words, the right of set-off is mutual and exists without regard to whose specific benefit it may, as a practical matter, contribute.

In the case of Blakey v. Brinson, 286 U. S. 254, 52 S. Ct. 516, 76 L. Ed. 1089, 82 A. L. R. 1288, upon which defendant relies, the bonds ordered were never purchased by the bank or delivered to it. The court in this situation refused to impress the general deposit with a trust character. It is not apparent how any other result could have been reached, for what the plaintiff had there was merely a right of action for breach of contract upon the part of the bank to make the purchase as it had agreed to do. The cases of In re North Mo. Trust Co. (Mo. App.) 39 S.W.(2d) 412; Gibson v. Bank (Mo. App.) 52 S.W.(2d) 411; Howland v. People ex rel., 229 Ill. App. 23; and Andrew v. Bank, 205 Iowa, 888, 219 N. W. 53, are of similar import. In neither instance had the bank purchased the property it had agreed to buy. However, in Evans v. French, 222 Mo. App. 990, 6 S.W.(2d) 655, under the particular facts there existing, though the securities had not been purchased, the court held that money deposited in the bank to pay for the bonds, constituted a trust fund.

Since this cause was tried, the conservator has been succeeded by trustees who have received the bonds from him and hold same subject to the rights of plaintiff. These trustees have been made parties defendant and have deposited the bonds with the clerk of this court subject to the order of the court.

There will be a decree for plaintiff against defendants directing- the clerk to deliver the bonds to her as prayed, at the cost of defendants.

In the foregoing I have included all of the essential facts and my conclusions of law. Hence, there are no separate findings and conclusions, the foregoing being adopted as such.