author: CAMPBELL, District Judge.

text:
    MARKS v. WENZEL et al.
    District Court, E. D. New York.
    Oct. 20, 1932.

      Julius L. Rassner, of Brooklyn, N. Y. (Lloyd B. Kanter and Harry H. Sehutte, both of Brooklyn, N. Y., of counsel), for plaintiff.
    Shaine & Weinrib, of New York City, for defendant Wenzel.
    Baylis & Sanborn, of New York City (Frederick H. Sanborn, of New York City, of counsel), for defendant bank.
   CAMPBELL, District Judge.

This is an action in equity, brought by a trustee in bankruptcy, to set aside as preferential, under the provisions of the Bankruptcy Act (11 USCA § 1 et seq.) and under section 15 of the Stock Corporation Law of the state of New York (Consol. Laws N. Y. c. 59), an assignment made on March 7, 1930, by Werner-Mitehell Company, Inc., to defendant Bank of Huntington & Trust Company of moneys due or to become due to the bankrupt from, the state of New York, in connection with work performed and materials furnished by the bankrupt under its contract with the Long Island state park commission, for the construction of a bathhouse at Jones Beach, Long Island,, and to recover an alleged payment received on April 11, 1930, of $5,000 and an alleged payment received on May 31,1930, of $40,000.

Briefly stated, the facts are as follows:

Werner-Mitehell Company, Inc., the bankrupt above described, was incorporated in November, 1924, and was engaged in the contracting business around New York City, with an office in Brooklyn, from 1925 until the filing of the petition in bankruptcy.

The defendant Wenzel is a retired contracting plumber and a man of some means. During all the times in question he resided and still resides at Huntington, Long Island, where during all of said times he had numerous activities and was well and favorably known at the defendant bank.

He was an old and intimate friend of the Werners, and sometimes loaned money to them.

The said bankrupt was a family affair with a very small capital.

On or shortly prior to April 4, 1929, the said bankrupt secured the contract to construct a bathhouse for the Long Island state park commission, at Jones Beach, Long Island.

The said bankrupt was already engaged on a job at Avenue Z, Sheepshead Bay, for the city of New York.

The small capital of the said bankrupt was already engaged in the Avenue Z job, and was insufficient to finance the job at Jones Beach.

William Werner, Sr., then went to Huntington, Long Island, and asked the defendant Wenzel to lend the said Wemer-Mitehell Company, Inc., $50,000 on its note, and promised to repay the loan from the moneys to be received from the Jones Beach job as they came in from time to time.

The defendant Wenzel said he could not make a loan of that size, but would see if the bank would let him have it.

He requested the loan from Mr. Conklin, president of the defendant bank, and told him that he (Wenzel) intended to reloan the money to the said Werner-Mitehell Company, Inc., and’ that William Werner, Sr., had promised to repay him (Wenzel) out of the proceeds of this job as the moneys were received from time to time, which was a fact; and the defendant Wenzel also told the said president of the defendant bank that he would repay his loan to the bank as he received the money from said Wemer-Mitehell Company, Inc., and that said company would open an account with the said bank.

The defendant bank loaned $59,000' to the defendant Wenzel, and took his three months’ note for that sum, secured by a deed to his real estate in Huntington, which deed was not recorded.

At the request of the defendant Wenzel, an account was opened in the defendant bank in the name of the bankrupt, and the $50^000 placed to its credit on April 4, 1929'.

The defendant Wenzel took the demand note of the bankrupt.

The bankrupt then proceeded with the performance of the Jones Beach contract, and on July 29', 1929, it received a payment on the contract of $128',716.92, which it deposited in the defendant bank, and two days later repaid the defendant Wenzel $25,000 by check which he indorsed to the defendant bank as payment on account of his note.

On November 11, 1929, the bankrupt again borrowed $15,000 from the defendant Wenzel which the defendant bank loaned him, taking his note therefor, and he passed it on

the bankrupt, taking its note.

On December 12,1929, the bankrupt again borrowed another $5,000 from the defendant Wenzel, which the defendant bank loaned him, taking his note therefor, and he passed it on to the bankrupt, taking its note, and at the same time the defendant Wenzel gave the def endant bank a, letter, which was dictated by Addison W. Sammis, the secretary and treasurer of the defendant bank at the time, reading as follows:

“In view of the fact that the Bank of Huntington and Trust 'Company is this day making to me a loan of $5,000 in addition to the $40,000 which I have already borrowed from the bank, I beg to certify as follows:

“That I am borrowing the same for the Werner Mitchell Co., Inc., that said Werner Mitchell Co., Inc., have already completed for the State work for which they will be paid in the amount of over $200,000 and that a small amount of work still to' be completed will give them a total amount due from the State of $240,000;

“I further certify that this amount is due and should be received and deposited in the Bank of Huntington and Trust Company within thirty days from this date, and that there are no offsets or claims which will in any way affect the claim of said Werner Mitchell Co., Inc., on the payment to be received from the State.

“I furthermore certify that the notes which I have given to the Bank of Huntington and Trust Company will be paid from the amount to be received in accordance with the agreement which I have with the Werner Mitchell Co., Inc.”

On December 28, 1929, the $5,000 loan was repaid by the bankrupt to the defendant Wenzel and by Wenzel to the defendant bank.

The bankrupt paid interest to Wenzel regularly on the amounts loaned by him to it, and he paid the interest to the defendant bank.

The Jones Beach job was virtually finished, and the large final payment seemed about to become due.

The bankrupt was bidding on new work.

Final payment on the Jones Beach job continued to be delayed. The money from that job looked to be certain, but the time of payment was uncertain.

The defendant Wenzel was making monthly renewals of his notes in the defendant bank.

On January 6, 1930, the bankrupt owed the defendant Wenzel $40,000, which he in turn owed to the defendant bank, the latter holding the notes of the defendant Wenzel for $25,000' and $15,000', respectively, and on that day the two loans were consolidated, the defendant Wenzel giving to the defendant bank his note for $40,000', payable one month after date.

On January 10,1930, the defendant bank loaned the defendant Wenzel $5,000 additional on his one month’s note, which he in turn loaned to the bankrupt.

On January 23, 1930, William Werner, Jr., prepared and on behalf of the bankrupt executed an assignment of all the moneys due or to become due from the Jones Beach job to the defendant bank, and on January 28th he sent a copy to the state comptroller for filing in his office, and delivered a duplicate original to the defendant Wenzel, who at the request of William Werner, Jr., took it to the defendant bank and delivered it to Mr. Sammis, at the end of January or the first part of February, 1930.

The defendant bank did not request the assignment and knew nothing about it until it was delivered to Mr. Sammis, about February 1, 1930.

The making of the assignment was the idea of William Werner, Jr., who suggested to the defendant Wenzel that, instead of renewing the notes from month to month, he would give the defendant Wenzel an assignment, or the defendant bank an assignment, so that the assignment would be in the hands of the bank.

The bank had had no dealings whatever with the bankrupt up to this time, except those of bank and depositor.

The bankrupt was not indebted to the defendant bank.

The defendant bank never took any steps in regard to the assignment, but simply waited for the money to be paid by the state, and upon its collection proceeded to close the transaction.

The assignment was absolute in form and transferred to the defendant bank the moneys that were to come from the state, without any qualifications whatever.

On February 3, 1930, the bankrupt desired to make a bid on another contract, which was required to be accompanied by a certified cheek for $7,500, and applied to the defendant Wenzel for the money, who' borrowed it from the bank and loaned it to the bankrupt.

The bid failed, and on February 7, 19*30', the money was repaid by the bankrupt to the defendant Wenzel, and by Wenzel to the defendant bank.

On February 6, 1930, the $40,000 note of the defendant Wenzel, held by the defendant bank, was renewed for one month, and thereafter allowed to run as an open item.

The defendant Wenzel at the same time allowed the bankrupt to extend its note for another month, and thereafter allowed it to rmi as an open item.

On February 10, 1930, the $5,000 note made by the defendant Wenzel to the defendant bank was renewed for one month, and thereafter allowed to run as an open item. The defendant Wenzel, at the same time, allowed the bankrupt to extend its note for another month, and thereafter allowed it to run as an open item.

The defendant Wenzel, during February, 1930, made other loans to the bankrupt aggregating $2,700, which, sums do not appear to have been borrowed by Wenzel from the defendant bank, and which were repaid by the bankrupt on February 27, 1930.

The assignment of January 23, 1930, was not filed in the proper office, and, on or about March 7,1930, William Werner, Jr., without the knowledge of the defendant bank or the defendant Wenzel, prepared and filed with the state department of audit and control, and with the Long Island state park commission, the proper offices, a second or confirmatory assignment, and a few days thereafter delivered a duplicate original copy to the bank, which accepted and kept it as it had the other.

The first that the bank knew of this assignment was when it was apprised of it by a letter of the state comptroller.

William Werner, Jr., prepared the assignment which was absolute in form and purported to assign all the moneys due or to become due under the Jones Beach contract to the bank, but he testified, “When the bank got the money they were supposed to deposit it to our account.”

About March 15, 1930, a notice of lien was filed, and Mr. Sammis of the defendant bank, suggested to the defendant Wenzel “That it might be well if he had a financial statement to file with the bank,” and in accordance with that suggestion the defendant Wenzel “asked for the statement.”

About March 15, 1930, the defendant Wenzel brought the statement to the bank.

The statement showed solvency with a favorable balance including estimates of expenses for completion of both joi>s on hand, of $11,416,47.

There is no evidence that Sammis, of the defendant bank, or the defendant Wenzel, knew that an alleged obligation of $10,000 was owing to Miss Werner and had been omitted, even if anything’ was due to- her. They were not in a position to know and had no motive for remaining ignorant.

On March 22d, the bankrupt sent to the defendant Wenzel its two cheeks to his order for $5,000' and $40,000, respectively, with the following explanatory letter:

“My dear Mr. Wenzel: In regard to our indebtedness of $45,000.00 with interest, which amount you borrowed from the Bank of Huntington for our account in accordance with your suggestion, we are sending you herewith two checks, one for $5,000.00 and one for $40,000.00', dated March 22nd.

“As you understand, we do not have any monies in the bank to meet these checks at this time. We expect to meet the cheek for $5,000.00' in about two weeks, which will be part of the money which we will receive from the Sheepshead Bay job, and the check for $40^000.00 in about four weeks. The cheek for $40,000.00 will be paid out of the monies which will be deposited at the Bank of Huntington under the assignment which we heretofore made to the Bank of Huntington coming to us from the Jones Beach job.

“It is understood that the $5,000.00' cheek will be paid out of the Sheepshead Bay job, and the $40,000.00 check will not be presented until the bank receives the money under the assignment of the Jones Beach job.”

After indorsing the checks Wenzel delivered them to the bank on March 25,1930'.

On April 10, 1930, the bankrupt made a deposit in the defendant bank of $18,199.50', received on the Sheepshead Bay job.

On April 11, 1930, the bank charged off the amount of the said $5,000 cheek from the deposit credit of the bankrupt, marked the check as paid, and returned the $5,000 note to the defendant Wenzel.

At the time that the assignment of March 7, 1930, was filed, bnt one lien that of the Montauk Plumbing & Heating Company, had been filed.

Subsequently other liens were filed, two of which the bankrupt bonded.

On May 14, 1930-, the bankrupt wrote letters to the defendant bank authorizing it to pay the three undisputed liens, including the lien of the Montauk Plumbing & Heating Company, from the final payment due from the state on the Jones Beach job. The de>fendant bank thereupon wrote letters to these lienors that, when the expected payment was received from the state, the amount of their liens would be paid to them by the bank. On May 26th, the bankrupt sent a letter to the defendant bank inclosing three checks, dated May 28, 1930, to the order of these lienors, or the bank, for the amount of the liens.

On May 31, 1930-, the bank received from the comptroller a warrant or check, drawn payable to th.e defendant bank, the assignee, for the final payment on the Jones Beach job, in the sum of $62,553.09, and credited it to the account of the bankrupt.

The defendant bank then charged the account of the bankrupt with $40,000-, the amount of the cheek aforesaid, and the defendant Wenzel paid the interest, thereby settling the note to the defendant bank, made by the defendant Wenzel, and the defendant bank returned the note and deed, which he had given as security to the defendant Wenzel. The defendant bank also charged the bankrupt’s account with the three cheeks covering the liens, and, in order to have vouchers for the payments, the defendant bank issued its own checks to the order of the lienors, which were paid by the bank in due course.

The bankrupt was solvent on January 23, 1930.

The bankrupt was solvent on March 15-, 1930, and there is no evidence of any financial change adverse to the bankrupt between March 15-, 1930-, and March 25, 1930-, when the said cheeks were delivered to the defendant bank and April 11, 1930, when the $5-,-000- cheek was charged to account of the bankrupt by the defendant bank.

It is on these facts that plaintiff asks for a decree against the defendants.

Plaintiff contends, and defendants deny, that the defendant Wenzel was a stockholder of the bankrupt.

The stock book of the bankrupt was not produced. The only evidence offered on behalf of plaintiff was the cashbook, which, as I view all the evidence, did not show that the defendant Wenzel was a stockholder, or that he invested the $10,000 in question in the bankrupt, but, on the contrary, it shows that he made a loan of that sum to William Werner, Sr., on which he was paid interest.

Assuming, however, that it does appear from the cashbook that the defendant Wenzel was a stockholder that alone is not sufficient, and the case of Union National Bank v. Scott, 53 App. Div. 65, 66, 66 N. Y. S. 145, cited by the trustee, is not in my opinion authority in support of plaintiff’s contention.

Even if the stock book had been produced and showed the name of the defendant Wenzel as a stockholder, it would only create a presumption which could be destroyed by evidence. Breck v. Brewster, 150 App. Div. 202, 134 N. Y. S. 697.

The defendant Wenzel is in no- way responsible for the missing ledger. And the evidence shows that the defendant Wenzel knew nothing of the entries in the books of the bankrupt.

The loan of $10,000- seems to have been made by the defendant Wenzel to William Werner, Sr., and by him loaned to the bankrupt. Whatever may have been done with reference to issuing stock to William Werner, Sr., when he made the loan to- the bankrupt, such stock appears to have been retired when the loan was paid. But in any event, the defendant Wenzel has not been shown to have had any part in or knowledge of the stock and its disposition, other than that he refused 100- shares offered to him by William Werner, Sr., as security for the loan.

There was no proof by common-law rules of evidence that the defendant Wenzel was a stockholder of the bankrupt, and the uncontradicted oral evidence of William Werner, Sr., and the defendant Wenzel, is that he was not such a stockholder. Therefore Zander v. New York Security & Trust Co., 178 N. Y. 208, 70 N. E. 449, 102 Am. St. Rep. 492, and U. S. Radiator Corp. v. State of New York, 208 N. Y. 144, 101 N. E. 783, 46 L. R. A. (N. S.) 585, cited by the plaintiff, are not in point.

While it is true that there ma.y be some suspicion as to the relations of the defendant Wenzel with the corporation, it does not seem to me that those suspicions point to an ownership of any stock; and, let the suspicion be what it may, it is insufficient to- support a finding that the defendant Wenzel was a stockholder of the bankrupt. Brookheim v. Greenbaum (D. C.) 225 F. 635, affirmed (C. C. A.) 225 F. 763.

The defendant Wenzel has not been shown to have been a stockholder of the defendant bank, and no recovery can be had against him under section 15 of the Stock Corporation Law of the state of New York, on the theory that he was a stockholder of the bankrupt.

The notes held by the defendant bank for $40,0.00 and $5,000; respectively, were drawn by the defendant Wenzel, and were not indorsed by the bankrupt; therefore, on January 23, 1930; the bankrupt was not indebted to the defendant bank on said notes.

There is no evidence to show that the bankrupt was insolvent at that time.

The bankrupt was indebted to the defendant 'Wenzel at that time in the sum of $45,-000 for money loaned by him to it, which money he had borrowed from the defendant bank, for which loans the bankrupt had given its notes to the defendant Wenzel,

At the time of his making the original loan of $50,000 to the bankrupt, the defendant Wenzel had been promised by William Werner, Sr., who solicited the loan, that payment would be made as the money was received from the state.

The final payment from the state was not made, as work remained to be done, and as a consequence the bankrupt’s note to Wenzel, and Wenzel’s note to the defendant bank, were being renewed from month to month, and William Werner, Jr., with the intention to render this unnecessary, gave the assignment to the defendant bank of the money to he paid on the Jones Beach job.

The bankrupt was asking extension of the time of payment of its debt to the defendant Wenzel, and he in turn was asking extension of the time of payment of his debt to the bank, and, whatever may now be said, the purpose of the execution of such assignment was undoubtedly to facilitate collection by the bank, and to secure the payment of the bankrupt’s debt to the defendant Wenzel, who was indebted to the defendant bank for the money he had loaned to the bankrupt.

There is no evidence on which could be predicated insolvency of the bankrupt at that time.

Subsequent to the making of such assignment, the defendant Wenzel extended the time of payment of the notes of the bankrupt, and the defendant hank extended the time of payment of the notes of the defendant Wenzel, and thereafter the notes so given were allowed to stand as open items.

The assignment of January 23,1930, having been filed improperly, on March 7, 1930, William Werner, Jr., filed another assignment to the defendant bank, in the proper offices.

He did not consult with either of the defendants before filing such assignment, and it was not requested by either of them.

There is no evidence that the bankrupt was insolvent at that time; on the contrary, the evidence is that the bankrupt was solvent, and there is no reason whatever why there should be deducted from the balance shown in the statement of March 15, 1930;, a claim of Miss Werner for $10,000; as it appears to me that such sum was not due to her, but had been paid.

There is no* evidence to disprove the account receivable of $4,100' due to the corporation from William Werner, Jr., and shown in the statement made by the bankrupt, of March 15; 1930; and given to' the defendant bank by the defendant Wenzel.

That the assignment to the defendant hank was for the security of the defendant Wenzel, as to the $40,000 note, is plainly shown by the letter of the bankrupt, of March 22, 1930, and the two cheeks of $40,000 and $5,000; respectively, to the order of the defendant Wenzel, drawn on the Bank of Huntington by the bankrupt.

As to the $5,000; the letter clearly provides for its payment from a different fund.

There is no evidence to show that the bankrupt was insolvent on that date.

The $5;000 check drawn to the order of the defendant Wenzel which he had indorsed and left with the defendant bank, was paid on April 11,1930; out of funds received from the Sheepshead Bay job, and deposited in the defendant bank on April 10,1930.

On May 31, 1930, the defendant bank received the comptroller’s warrant or cheek drawn to its order as assignee for the balance of the Jones Beach job, and deposited the same to the credit of the bankrupt, and then charged against the same the cheek for $40,000 drawn to the order of the defendant Wenzel, which he had indorsed and left with it.

The defendant hank was not a creditor of the bankrupt as to the said $45,000; and received no payment from the bankrupt.

The defendant bank and its officers had no knowledge, nor were they at any time before tbe said cheeks were paid by it put on notice that the bankrupt was insolvent, and no payment of the said $45,000 or any part thereof was made by the bankrupt to the defendant bank.

The plaintiff can have no recovery against the defendant bank.

The bankrupt was indebted to the defendant Wenzel in the sum of $45,000, and that debt was paid to him.

The plaintiff contends that the payment of the aggregate sum of $45,000 was a transfer voidable under section Ob of the Bankruptcy Act (11 USCA § 96 (b), so much of which as is necessary for consideration at this time reads as follows:

“If a bankrupt shall have * * * made a transfer of any of his property, and if, at the time of the transfer * * * and being within four months before the filing of the petition in bankruptcy * * * the bankrupt he insolvent and the * * * transfer then operate as a preference, and the person receiving it * * “ shall then have reasonable cause to believe that the * * * transfer would effect a preference, it shall he voidable by the trustee and he may recover the property or its value from such person.”

Five elements of such voidable preferences are presented by this section of the Bankruptcy Act, each of which is necessary to sustain a suit by the trustee. They are:

~(1) That a transfer of property of the debtor has taken place.

(2) That the debtor at the time of the transfer was insolvent.

(3) That the transfer was made within four months before the filing of the petition in bankruptcy.

(4) That, by the transfer, the creditor must have been enabled to obtain a greater percentage of his debt than other creditors of the same class.

(5) That the person receiving the transfer must have had reasonable cause to believe that the enforcement of the transfer would effect a preference. Grandison v. National Bank of Commerce (C. C. A,) 231 F. 800.

A consideration of the law and the facts leads me to the following conclusion as to each element in its order, as follows:

1. A transfer of $45,000' from the bankrupt to the defendant Wenzel took place.

2. That the bankrupt was insolvent at the time of the transfer has not been shown.

The evidence does not fiz a positive date when the bankrupt became insolvent earlier than May 31, 1930-, when it is shown by the financial statement of the bankrupt as of May 31, 1930, prepared by its certified public accountant, Karmel (Plaintiff's Exhibit 9), and which was not based entirely on the books or records of the bankrupt.

With reference to the two payments of $5,000 and $40,000', respectively,, I will deal with them separately.

I will first consider the payment of $5,-000’. This payment was not made from the proceeds of the Jones Beach job, nor was it covered by the assignment of those proceeds to the hank.

The letter of March 20:, 1930', plainly shows that this sum was to be paid from the proceeds of the Sheepshead Bay job.

The financial statement of the bankrupt of March 15', 1930’, showed solvency and m> evidence has been offered that shows insolvency of the bankrupt on April 11, 1930;

Solvency having been shown on March 15, 1930, is presumed to have continued until insolvency is shown.

Therefore it matters not whether it he found that the transfer was made on March 22, 1930, by the delivery of the $5)000' cheek by the bankrupt to' the defendant Wenzel, or the charging off of that check by the hank on April 11, 1930, as there is no- evidence in this case which would support a finding that the bankrupt was insolvent on either date.

Figures are given at the top of page 16 of the plaintiff's brief which are not in evidence and cannot he considered.

The concession that the trustee has not come into possession of a sufficient sum to enable him to pay and discharge the bankrupt’s debts in full is far from proving insolvency on April 11,1930.

With reference to the transfer of the $40,-000, the question of the insolvency of the bankrupt at the time of the transfer is dependent upon whether such transfer he held to- have been made on January 23, 1930, March 7, 1930, March 22:, 1930) March 25, 1930, or May 31, 1930; If on any of the first four mentioned dates, then the bankrupt was not shown to have been insolvent at the time. If on the last-mentioned date, May 31, 1930, then it was at a time when the bankrupt was, according to the said statement (Plaintiff's Exhibit 9) insolvent.

As it will be necessary to determine when the transfer was made in order to arrive at a conclusion as to whether it was made within four months before the filing of the petition in bankruptcy, it will be sufficient to discuss that but once.

3. As I have hereinbefore stated, I am convinced that the assignment of January 23, 1930, and the confirmatory assignment of March 7, 1930) were made to the defendant bank to facilitate collection by it of the proceeds of the Jones Beach joh and for the security of the defendant Wenzel, the creditor of the bankrupt, and that the transfer to the defendant Wenzel was made by the bankrupt by the assignment.

The first assignment of January 23,1930', was clearly before the commencement of the four months’ period prior to the filing of the petition.

Plaintiff contends that such assignment was ineffective to save it from condemnation as preferential under section 60b of the Bankruptcy Act (11 USCA § 96 (b), as it was not filed in the proper office.

Under sections 15 and 16 of the Lien Law of the state of New York, Laws 1909, c. 38 (Consol. Laws N. Y. c. 33), the-only class originally sought to be protected by those provisions are subsequent lienors. By amendment in 1925 (Laws 1925, c. 624), a subsequent assignee in good faith and for a valuable consideration, whose assignment is first duly recorded, is brought within its protection.

By chapter 515, of the Laws of 1929, these sections were re-enacted without substantial change, no change being made in section 16, and by chapter 859 of the Laws of 1930 section 16 was amended by changing the filing time from ten days to twenty days.

In Edison Electric Illuminating Co. v. Horace E. Frick Co., 221 N. Y. 1, 116 N. E. 369, L. R. A. 1917F, 1123 (1917), it was held that the provisions requiring filing could be taken advantage of by subsequent lienors only, and could not be invoked for their benefit by a judgment creditor or attaching creditor.

The trustee cannot take advantage of the nonfiling of the assignment of January 23, 1930. In re Interstate Paving Co. (D. C.) 197 F. 371.

Under section 47a of the Bankruptcy A ct, as amended in 1910 (11 USCA § 75 (a), the trustee was “deemed vested with all the rights, remedies, and powers of a judgment creditor holding an execution duly returned unsatisfied” “as to all property not in the custody of the bankruptcy court.” In re Morris (C. C. A.) 204 F. 770, 771.

The status of the trustee as a judgment creditor holding an execution returned unsatisfied exists as of the date of the filing of the petition in bankruptcy. Bailey v. Baker Ice Machine Co., 239 U. S. 268, 36 S. Ct. 50, 60 L. Ed. 275.

The trustee being vested with the rights, remedies, and powers of a judgment creditor, as of the date of the filing of the petition in bankruptcy, cannot attack an assignment which has not been filed.

Plaintiff contends, however, that as the filing of an assignment of January 23, 1930, was permitted by section 16 of the Lien Law of the state of New York, omission to file brings it within the operation of section 60b of the Bankruptcy Act (11 USCA § 96 (b).

This contention cannot be based upon section 60b as it reads, for the reason that by its terms the four months’ period commences from the recording or registering of the transfer, “if by law recording or registering thereof is required.” It does not sa.y, “required or permitted,” but simply “required.”

Section 60b has not been amended, but section 60a was amended in 1926 (11 USCA § 96 (a) by including a transfer within four months of bankruptcy, which period does not expire until four months after the registering or recording of the transfer, where such transfer is required or permitted. The words “or permitted” are new. The same words are found in section 3b (11 USCA § 21 (b).

Prior to the amendment of section 60a, section 60b had been construed in Carey v. Donohue, 240 U. S. 430, 36 S. Ct. 386, 389, 60 L. Ed. 726, L. R. A. 1917A, 295, wherein it was held that, where the failure to record or register the transfer does not make the transfer void as to creditors, but only to bona fide purchasers or incumbrances, the date of the recording is not the date from which to compute the four months, but the case stands precisely as if recording or registering were not required. See, also, Telford v. Hendrickson, 120 Minn. 427, 139 N. W. 941, 31 A. B. R. 866, decided before the 1926 amendment of section 60a, and Heiman v. Parnass (D. C.) 40 F.(2d) 558, decided after such amendment.

Plaintiff contends that section 60a, as amended in 1926 (11 USCA § 96 (a), and section 60b (11 USCA § 96 (b) must be read together, and that Congress intended to apply the same measure to the definition, 60a, and the trustee’s right of avoidance, 60b, and cites in support thereof Gilbert’s Collier on Bankruptcy (2d Ed. 1931) p. 878, ánd Matter of Bowles, 14 A. B. R. (N. S.) 133 (referee’s opinion).

The weight of authority seems, however, to be against plaintiff’s contention. First National Bank v. Live Stock National Bank, 31 F.(2d) 416, 419, in which the Circuit Court of Appeals of the Eighth Circuit said: “The 1926 amendment changed only section 60a and not 60b. It simply made a preference as defined in this section conform to seetion 3b, and did not in any way change the rule with reference to preferences that were voidable.”

This distinction was recognized in Carey v. Donohue, supra, where the court said: “Congress did not undertake in section 60 to hit all preferential transfers (otherwise valid) merely because they were not disclosed, either by record or possession, more than four months before the bankruptcy proceeding.”

It therefore seems to me that the assignment as to the $40;000 was of the date of January 23, 1930, and not within the four months’ period prior to the filing of the petition in bankruptcy herein.

4. Unquestionably the defendant Wenzel, creditor, was by the transfer enabled to obtain a greater percentage of his debt than other creditors in the same class.

5. This brings us to a consideration of the last of the five elements hereinbefore enumerated.

I shall not only consider whether the creditor, the defendant Wenzel, had reasonable cause to believe that the enforcement of the transfer w'ould effect a preference, but also whether the defendant bank had such notice.

I shall consider the question with reference to the defendant bank, first, because if it should be held that I am in error in finding that the defendant bank was not a creditor, and did not receive payment of a debt from the bankrupt, then the defendant bank could not be held liable, unless it be shown that it had such reasonable cause to believe; and, second, because if the defendant bank be held to have acted on behalf of the defendant Wenzel, or as trustee for the benefit of the defendant Wenzel, such reasonable cause to believe on the part of the bank might be imputed to the defendant Wenzel.

Again, there may be suspicion of knowledge by the defendant Wenzel as to the financial condition of the bankrupt, there certainly appears to be none as to the defendant bank; but that is not sufficient, nor would it be sufficient even to show that the defendant Wenzel had a mere suspicion of insolvency of the bankrupt. Grant v. National Bank, 97 U. S. 80, 82, 24 L. Ed. 971.

That the defendant Wenzel was a friend of long standing of the members of the Werner family is conceded, but that does not create any presumption against the defendant Wenzel, the creditor. Marshall v. Nevins (C. C. A.) 242 F. 476.

That he actually loaned to the bankrupt the moneys represented by the notes for $45,-006, which were repaid to him, is clearly shown.

The loan originally for $50;000 was made by the defendant Wenzel to the bankrupt, at the request of William Werner, Sr., president of the bankrupt, to enable it to carry out a state contract which its officers considered a profitable contract.

The defendant Wenzel did not have sufficient cash, and therefore borrowed it from the defendant bank, which he at the time informed of his intention to loan the money to the bankrupt, and which he also informed of the arrangement that, as the money was received from the state, the loan would be paid off.

That such was the arrangement is shown by the fact that, while Wenzel’s note to the bank was made payable at a fixed date, the note from the bankrupt to the defendant Wenzel was made payable on demand; and further by the fact that when the bankrupt, in July, 1930; received a payment of approximately $129,000 on the state job, it immediately reduced the loan by a payment to the defendant Wenzel of $26-,000, by check, which he in turn gave to the defendant bank in reduction of his note, which was not due until October.

The evidence shows that the work on the state job continued without trouble or interruption, and in January, 1930, was substantially completed, and an early payment from the state was expected.

In the meantime the defendant Wenzel had loaned additional money to the bankrupt, some of which had been repaid, but the balance to him from the bankrupt, and from him to the defendant bank, was $45,000.

There is no evidence in this ease on which could be founded any claim that the defendant Wenzel or the defendant bank, at the time of the making by the bankrupt of the assignment to the defendant bank on January 23,1930, had reasonable cause to believe that the enforcement of the assignment would effect a preference.

All of the loans made to the bankrupt by the defendant Wenzel, and the very fact that such assignment by the bankrupt was a voluntary act, not requested by either the defendant bank or the defendant Wenzel, clearly confirm such finding.

The defendant Wenzel was not familiar with the books or the business affairs of the bankrupt, and there is no evidence which shows that he knew of any entries in its books or of its indebtedness.

The evidence shows that he received no money for the making of the loans and had no financial interest in the corporation. All that was paid to him by the bankrupt was interest on his loans to it, which he paid to the defendant hank for the loans to him.

Counsel for the plaintiff contends that such a condition is so unusual as to make the story improbable.

This does not seem to me to be true, as the defendant Wenzel was certainly not the first man to assume obligations to assist a friend whom he trusted.

All that the defendant Wenzel received for himself, as appears from the evidence, was a subcontract from the bankrupt for work done for a concern other than the state, at Jones Beach, for which the defendant Wenzel was paid in full, and on which the bankrupt made a profit.

If as I believe the transfer was made by said assignment of January 23, 1930, there would be no need to consider further, as whatever happened after that would not be of moment. Chapman v. Hunt (C. C. A.) 254 F. 768; Sexton v. Kessler & Co,, 225 U. S. 90, 32 S. Ct. 657, 56 L. Ed. 995.

If, however, there be any question, I will consider thfe question with reference to the date of March 7, 1930, when without any request by either the defendant bank or the defendant Wenzel the bankrupt executed the confirmatory assignment which it filed in the proper office.

Nothing is shown, in the evidence which would warrant a finding that either the defendant Wenzel, or the defendant bank at that time had any reasonable cause to believe that the enforcement of the transfer would-effect a preference.

On March 15, 1930; in response to a suggestion from the defendant bank, the defendant Wenzel obtained from the bankrupt a statement in writing, which showed it to be solvent. Neither defendant had aiiy reason to doubt the statement, and certainly the defendant Wenzel did not doubt William Werner, Jr., whom he trusted, as is shown by the loan he subsequently made to him, and the defendants were justified in believing that the state of solvency disclosed by that statement was correct. Irving Trust Co. v. Bank of United States (C. C. A.) 54 F.(2d) 535, 537.

The same is true as. to March 22-, 1930, when the two checks were sent by the bankrupt to- the defendant Wenzel, and as to March 2o, 1930, when they were delivered by him to the defendant bank with the letter of the bankrupt.

The statement of the bankrupt of the 15th day of March, 1930, having been received and relied on by the defendant Wenzel and the defendant bank, and they not having received any information of any change in the bankrupt’s financial condition, and not having been put on notice, they certainly did not have reasonable cause to believe that the charging of the $5,000' cheek to the bankrupt’s account, on April 11, 1930; would effect a preference.

Final payment on the state contract was held up pending the completion of a small amount of work on the contract and the filing of the liens that were bonded, or for which checks were drawn and given to the defendant bank, was not sufficient to put the defendants on notice, and the fact that the defendant bank guaranteed the payment of the hens, for which it received the checks, is sufficient of itself to show that the defendant bank had no doubt of the solvency of the bankrupt and had no reasonable cause to believe that the enforcement of the transfer would effect a preference.

The fact that the defendant Wenzel went to Jones Beach, twenty-five minutes distant from his home, partially for pleasure, and assisted the bankrupt to finish the job, was a perfectly natural thing, considering that only on receipt of the final payment on that job would his note be paid.

There is no evidence that on May 31,1930, or at any time prior thereto, either defendant knew of any change in the financial condition of the bankrupt from that of March 15, 1930, except that its debts were reduced by, the payments made from the proceeds of the Avenue Z, Sheepshead Bay job, which were deposited on April 10, 1930.

The first evidence of insolvency was the statement of the bankrupt’s accountant, made in June, 1930, as of May 31, 1930, of which neither defendant had any notice before the payment of the $40,000 was made on May 31, 1930.

Plaintiff makes some point of the fact that the defendant Wenzel made a loan of $5,000 to William Werner, Jr., when he disassociated himself from the bankrupt and started in business for himself, but, instead of showing knowledge or belief of the insolvency of the bankrupt by the defendant Wenzel, it shows confidence in the Werners which I cannot believe the defendant Wenzel, then holding the bankrupt’s note for $40,000, would have had if he had then had reasonable cause to believe that the bankrupt was insolvent and that the transfer to him of the $40;000 would effect a preference.

All that has been said here with reference to section 60b of the Bankruptcy Act applies as well to section 15 of the Stock Corporation Law of the state of New York, as amended in 1929, so much of whieh as is necessary for consideration reads as follows:

“§ 15. Prohibited transfers to officers, stockholders, directors or creditors. No corporation which shall have refused to pay any of its notes or other obligations, when due, in lawful money of the United States, nor any of its officers or directors, shall transfer any of its property to any of its officers, directors or stockholders, directly or indirectly, for the payment of any debt, or upon any other consideration than the full value of the property paid in cash. No conveyance, assignment or transfer of any property of any such corporation by it or by any officer, director or stockholder thereof, nor any payment made, judgment suffered, lien created or security given .by it or by any officer, director or stockholder 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, shall be valid, except as to any rights or interests whieh may be acquired thereunder by any person without notice or reasonable cause to believe that such conveyance, assignment, transfer, payment, judgment, lien or security would effect a preference, and except also that laborers’ wages for services shall be preferred claims and be entitled to payment before any other creditors out of the corporation assets in excess of valid prior liens or incumbrances.

This statute not only requires, in the case of creditors not officers, directors, or stockholders, proof of insolvency, or imminence of insolvency,- but also proof that the recipient had notice or reasonable cause to believe that a preference was intended.

No proof such as is required under that statute was offered.

The petition in bankruptcy was not filed herein until over five months after the assignment of January 23, 1930, and over one month after the check for $40,000, on May 31, 1930, was charged against the bankrupt’s account.

Plaintiff has failed to sustain the burden of proof whieh rested upon him.

The defendants are entitled to a decree dismissing the bill of complaint as to each of them, but, under all the circumstances, without costs. Settle decree on notice.

Submit proposed findings of fact and conclusions of law in accordance with this opinion, for the assistance of the court, as provided by the rules of this court.


source: Caselaw Access Project

author: MOSCOWITZ, District Judge.

license: Public Domain

text:
    THE IDA. COMPAGNIE D’ENTREPRISES COMMERCIALES EN EGYPTE v. COSULICH SOCIETA TRIESTINA DI NAVIGAZIONE.
    No. 13973.
    District Court, E. D. New York.
    March 19, 1934.
    Hill & Rivkins, of New York City (Robert E. Hill, of New York City, of counsel), for libelant.
    Kirlin, Campbell, Hiekox, Keating & MeGrann, of New York City (L. De Grove Potter and John J. Heckman, both of New York City, of counsel), for respondent.
   MOSCOWITZ, District Judge.

This is a hearing on the exceptions to the amended libel.

The amended libel alleges a cause of action founded upon deviation and sets forth with particularity the ports off her course lo which the ship deviated.

The respondent’s vessel left Hopewell, Va., with a cargo of Arcadian nitrate of soda, for the port of Alexandria, Egypt.

The libel states that the said steamship departed from the port of Hopewell, Va., but, under the direction of and with the knowledge of the respondent, failed to pursue her voyage in due course and with utmost dispatch, and wrongfully in violation of the respondent’s and ship’s obligation as common carriers departed and deviated from her said course and proceeded in a contrary direction thereto, and proceeded to New Orleans, La., Houston, Tex., Galveston, Tex., Mobile, Ala., Venice, Italy, Trieste, Italy, Eiume, Italy, and then proceeded to dispatch her cargo at Alexandria, Egypt, where the cargo was found not to be in the same good order and condition as when shipped, but on the contrary seriously injured and damaged by having come in contact with fire, water, and other substances, the nature of which is not known to the libelant, all of which is in violation of the respondent’s and the ship’s obligations as common carriers.

The exceptions to the libel allege in substance that the amended libel does not allege that the fire was due to the personal design or neglect of the respondent as required in section 4282 of the Revised Statutes (46 USCA § 182), and that the libel does not state facts sufficient upon which to base a cause of action.

The question in this ease is whether the amended libel sets forth a cause of action. It need not be decided, but must be assumed for the purpose of this motion that there was a deviation as stated in the amended libel. What is the effect on the shipowner’s liability if there is a deviation ? If there has been a deviation is it necessary for the libel-ant to affirmatively allege and prove that the fire was caused by the design or neglect of the ship’s owner as required by section 4282 of the Revised Statutes of the United States?

The law is well settled that a earner which has been guilty of deviation becomes an insurer for any damage suffered by the cargo. The Willdomino, 272 U. S. 718, 47 S. Ct. 261, 71 L. Ed. 491; The Citta Di Messina (D. C.) 169 F. 472; Thorley v. Orchis, 1 K. B. (1907) 660.

It is wholly immaterial whether her deviation had any cause or connection with the damage caused to her cargo. If the cargo was in good order and condition when the deviation occurred, the ship must answer for its subsequent damage. The Citta Di Messina, supra.

Section 4282 of the Revised Statutes of the United States (46 USCA § 182) states: “No owner of any vessel shall be liable to answer for or make good to any person any loss or damage, which may happen to any merchandise whatsoever, whieh shall be shipped, taken in, or put on board any such vessel, by reason or by means of any fire happening to or on board the vessel, unless such fire is caused by the design or neglect of such owner.”

The vessel having deviated from its course cannot claim the benefits of the fire statute. The Indrapura (D. C.) 171 F. 929; The St. Paul (D. C.) 277 F. 99; The Elizabeth Dantzler (D. C.) 263 F. 596; Charbonnier v. U. S. (D. C.) 45 F.(2d) 166.

Exceptions are overruled.

Settle order on notice.


author: GREEN, Judge.

text:
    CEMENT SECURITIES CO. v. UNITED STATES.
    No. H-232.
    Court of Claims.
    May 7, 1934.

      Robert R. Faulkner, of Washington, D. C. (J. B. Grant, of Denver, Colo., on the brief), for plaintiff.
    John A. Rees, of Washington, D. C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
    Before BOOTH, Chief Justiee, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
   GREEN, Judge.

This suit is brought to recover $52,415.24 paid as capital stock taxes by the plaintiff corporation for the fiscal years ending June 30, 1920, to 1924, inclusive. The plaintiff alleges in substance in its petition that it was merely a holding company during the years in suit and transacted no business other than was incidental to its ownership of stock of operating corporations. The question involved is whether during the period in question the plaintiff was “carrying on or doing business” within the meaning of section 1000 (a) (1) of the Revenue Act of 1918 (49 Stat. 1126).

The Commissioner who heard the evidence in the case has made a very voluminous report of the faets pertaining to this question. This report has been accepted by both parties with the exception of some minor matters which, in any event, would not change the ultimate conclusion of the court upon all of the evidence'in the case.

It is impossible within the reasonable limits of an opinion to refer to more than a very small part of the extremely numerous transactions in which the plaintiff was engaged during the period in question as shown by the evidence. To select a few of these items and discuss them would serve no useful purpose, for the conclusion which we reach is based upon the evidence as a whole, which abundantly satisfies us that the plaintiff was carrying on or doing business during the years involved in the case.

What has been said above makes it unnecessary for us to consider the other objections and defenses which defendant has set up against plaintiff’s case.

The plaintiff’s petition must be dismissed, and it is so ordered.


author: BREWSTER, District Judge.

text:
    THE PORT HUNTER.
    No. 562.
    District Court, D. Massachusetts.
    May 10, 1934.

      Daniel A. Shea, of Boston, Mass., for libelant.
    George A. Saxon, of Providence, R. L, for defendant.
   BREWSTER, District Judge.

This libel is brought in “a cause of possession, civil and Maritime” to recover the steamship Port Hunter, now lying submerged upon Hedge Pence Shoal, Vineyard Sound. The Port Hunter is claimed by the Maritime Construction & Salvage Corporation.

Statement of Pacts.

1. At some time in 1918, the steamship Port Hunter was in a collision off Vineyard Haven and drifted onto Hedge Pence Shoal and sank in about 75 feet of water so that the hull was completely submerged, the bow being about 40 feet' down. Two masts appeared above the water. Under stress of weather one of the masts was later swept away but the other still remains to mark the whereabouts of the sunken vessel.

2. The wreck was abandoned to underwriters which through its duly authorized agents on July 12, 1920; sold and transferred the wreck and its appurtenances to William T. A. Pitzgerald, as trustee for the libelant, the libelant paying in cash the full purchase price. Subsequently the trustee conveyed his interest to the libelant.

3. Prom 1920 to the present day, the Port Hunter has been allowed to remain where she sank. During the salvaging of some of her cargo, buoys were set about the Shoal by government officials. On June 12, 1933, the libelant employed a diver to anchor a buoy over the boat. Pbr some reason or other this only stayed in place for a short time. Except as above stated, neither the government officials nor the owner have taken any steps to mark the vessel. The fact that the boat was on a shoal against which navigators were duly warned by long established buoys and that the vessel’s mast at all times appeared above the water no doubt led the owner and authorities to regard further marking as unnecessary.

4. Since the purchase, the trustee and the libelant negotiated with cargo owners with reference to salvaging the cargo; had employed divers to go down into the holds; and had employed a resident of Vineyard Haven to keep watch of the wreck to see that no one molested it or the cargo.

5l There was evidence adequate to establish the fact that the libelant at no time intended to abandon the vessel. In fact, as late as September, 1933, he was in conference with one T. J. Smith, of Providence (claimant’s alleged predecessor in title), about salvaging the hull and its contents. No agreement was reached, as the assurances requested by libelant that Smith would carry out his part of the contract were not forthcoming.

6. On October 1, 1933, Smith proceeded to the vicinity of the wreck with witnesses, and, after placing a buoy, consisting of a barrel and weight, over the sunken vessel, ho put in the barrel a copy of a formal document, signed by him, wherein he recited his intention to seize and take possession “as a result of the abandonment by the one time owner” of the Port Hunter. He also recited that the boat was sunk in latitude 41- — 30 N. and longitude 71 — 30 W. in about 55 feet of water; that it had been submerged for over 12 to 15 years; that there were not, and for many years had not been, any markers or buoys indicating ownership over the boat or on nearby waters; and that he was placing his marker over the vessel as indicating his ownership. This statement was supported by affidavits, not under oath, of his witnesses who participated in the anchoring of markers over the ship.

7. The claimant is a Rhode Island corporation, of which said Smith is treasurer, and it was alleged that Smith had transferred all his interest in the Port Hunter to this corporation. I do not understand that there is any dispute respecting the transfer of whatever rights Smith had in the vessel from Smith to the corporation.

8. As soon as the claimant was seen removing machinery from the hull, notice was sent to the libelant by the party whom he had employed to keep a watch upon the wreck and, as a result, these proceedings were instituted.

Conclusions of Law.

At the outset it may be said that the good faith of Smith and his corporation, the claimant here, is open to serious question. No one knew better than Smith that the libelant claimed to be the owner and that he had no intention of abandoning the wreck. I know of no principle of admiralty law which enables one to “stake out” a claim to a derelict by floating over it barrels and depositing in one of the barrels the very elaborate document to which I have referred in the sixth paragraph of my findings of fact. In any event, I am satisfied that property rights cannot be acquired in any such manner. Whitwell et al. v. Wells et al., 24 Pick. (Mass.) 25; Duryea v. Elkhorn Coal & Coke Corp., 123 Me. 482, 124 A. 206; Merrill v. Fisher, 204 Mass. 600, 91 N. E. 132, 134 Am. St. Rep. 706, 17 Ann. Gas. 937.

In Whitwell v. Wells, supra, the court said at page 30 of 24 Pick. (Mass.):

“The salvors had a claim paramount to all others. They had the control, so far as was necessary, to enforce this claim. But their interest in the goods did not amount to ownership. By finding vessels or other chattels upon the ocean, the finders do not become the owners. The property remains as before, subject only to the right of salvage. This right is merely a lien, a right to retain the goods till the salvage be paid. This must stand essentially on the ground of other liens; and would give no right to pledge or sell the property. Martini v. Coles, 1 Maule & Selw. 140; Shipley v. Kymer, 1 Maule & Sclw. 484; Corlett v. Gordon et al., 3 Campb. 472. The salvors, therefore, had no authority to make a sale or consignment to the plaintiffs. And if they had done either, the act would have been unauthorized and inoperative.”

While this ease was decided many years ago in the state court, I believe it presents an accurate statement of the law. When a derelict is discovered on the high seas and it is salved, the salvors have a right of possession in the nature of a lien until they have been reimbursed by the owner. I have found no authority for the proposition that the salvor acquired absolute title, good against the owner.

The River and Harbor Act of March 3, 1899, §§ 15, 19, 20 (33 U. S. C. §§ 409, 414, 415 [33 USCA §§ 409; 414, 415]), did not confer upon the claimant or Smith any rights to seize the Port Hunter in the manner described. The purpose of this statute was to impose a positive duty upon the owner of a sunken vessel to mark and remove it promptly if in navigable waters and obstructing or endangering navigation and to relieve the United States of all liability after a specified period, in the event that it removed, sold, or otherwise disposed of the sunken craft.

While for the purposes of the statute there may be an abandonment after a lapse of time, it is not such an abandonment as will operate to terminate the rights of the owner. Abandonment is said to be a voluntary act which must be proved by a clear and unmistakable affirmative act to indicate a purpose to repudiate ownership. Duryea v. Elkhom Coal & Coke Corp., supra. I have found as a fact that no such positive intention existed in this case.

I conclude, therefore, that the libelant is entitled to recover possession, and the claimant has no right nor interest in the Port Hunter which this court can recognize.


author: LINDLEY, District Judge.

text:
    WILLIAMS v. THOMAS.
    No. 6163.
    District Court, E. D. Michigan, S. D.
    June 1, 1934.
    Emmons, Oren & Sleeper, of Detroit, Mich., for plaintiff.
    Nichols, Morrill, Wood, Marx & Ginter, of Cincinnati, Ohio (by Robert S. Marx, of Cincinnati, Ohio), for defendant.
   Findings of Fact.

LINDLEY, District Judge.

1. The defendant herein is the duly appointed and qualified acting receiver of First National Bank of Detroit, having been appointed as such by the Acting Comptroller of the Currency on May 11, 1933, and said First National Bank of Detroit closed its doors at the close of business on February 11, 1933, and never thereafter was opened for business.

2. On February 11,1933, Roy R. Williams, plaintiff in this cause, had on deposit in said First National Bank of Detroit in his commercial account, the net balance of $91,985,18 remaining therein after an adjustment of admitted mutual liabilities.

3. On February 11, 1933, First National Bank of Detroit had, among its assets, a promissory note dated November 21, 1932, payable ninety days after date, to the order of First National Bank of Detroit, in the principal amount of $35,000, with interest at the rate of 6 per cent, per annum, which note was executed as maker by Great Lakes Refining Company, a Michigan corporation, and which note was indorsed by H. H. Emmons, Roy R. Williams, C. B. Yan Dusen, W. F. Evans, R.’H. Webber, Oscar Webber, and M. L. Brown.

4. Said indorsers were accommodation indorsers, they having indorsed said note prior to its delivery to First National Bank of Detroit, without regard to priority as to liability among themselves; said indorsers were not payees, nor was any one of such indorsers the transferee or indorsee of any other one indorser.

5*. Said note was the last of a series of renewal notes, the first of such notes having been given to First National Bank in Detroit on September 3,1926-, at which time the sum of $35,000 was credited to Great Lakes Refining Company, and subsequently withdrawn by said corporation, which original note was indorsed exactly the same as the note involved in this suit, as was each subsequent renewal.

6. Said note to' date has not been paid and the maker of said note is insolvent and has been SO' for a long time past.

7. Since February 11, 1933, Roy R. Williams, the plaintiff in this suit, has received all of the dividends payable on his deposit accounts, except on the sum of $34,99*0.52, which amount is equivalent to the amount owing on the referred to note, and upon which amount no dividend has been paid.

8. The deposit account, above referred to, of $91,985.18 has been split into two claims, one for $34,990.52 and upon which dividends have been withheld as above referred to, and one in the amount of $56,994.66, upon which dividends have been paid.

9. C. O. Thomas, as receiver of First National Bank of Detroit, has withheld dividends on the said claim of $34,990.52 pending judicial determination of Roy R. Williams’ right to set off said sum against said note.

10. Roy R. Williams, the plaintiff herein, intends to proceed against the remaining indorsers on said promissory note for contribution after the set-off is allowed.

11. After the closing of said First National Bank of Detroit, the conservator thereof, appointed by the Comptroller of Currency, and who later became receiver thereof by similar appointment, withheld, and continues to withhold, sufficient of the deposit of the plaintiff herein, namely, $34,990.52, to pay the entire balance of said note.

12. Notwithstanding the repeated demands made by plaintiff for the payment of the dividends which have from time to time been declared by said conservator-receiver, the said conservator-receiver has refused to pay the same to said plaintiff.

13. Failing to receive said dividends as aforesaid, plaintiff herein has demanded that said conservator-receiver offset said note against said deposit and transfer said note to plaintiff, but that said conservator-receiver, defendant herein has and does refuse to do so.

14. In addition to the foregoing, immediately prior to the filing of the bill in the instant ease, the conservator-receiver made demand upon each of the seven individual indorsers for the payment in full of the balance of said note.

Conclusions of Law.

1. The plaintiff, Roy R. Williams, together with the remaining six indorsers, are joint accommodation indorsers and are only jointly liable to First National Bank of Detroit, and are not .severally liable, nor are they jointly and severally liable.

2. First National Bank of Detroit, being indebted to Roy R. Williams individually, and he being indebted to said bank jointly with six other individuals, the respective obligations or claims cannot be set off one against the other because of lack of mutuality. The claims are not duo to and from the same parties in the same capacity, which is essential to a valid set-off.

3. The plaintiff, being one of seven joint indorsers, seeking the set-off of his deposit in an insolvent national bank against his joint liability, cannot prevail unless the maker of such note is insolvent and the remaining six indorsers are also proven to be insolvent:

4. The burden of so proving such insolvency is on the party seeking to enforce the right of set-off, and the failure of such party to prove insolvency raises the presumption that the remaining parties to the obligation are solvent.

5. All set-offs are governed by the state of things existing at the time the bank closed, and no right of set-off can be created by events, happenings, or actions occurring or taking place after the appointment of a receiver.

6: The action of a receiver of an insolvent national bank cannot create a situation or state of facts, which could be construed as granting a right of set-off, if no such right existed at the time of his appointment or at the time of the closing of the bank.

7. The defendant should at once release to plaintiff the dividends upon plaintiff’s deposit now being withheld.

8. There should be a decree dismissing the bill of complaint for want of equity.

Memorandum of the Court.

Plaintiff is one of seven accommodation indorsers of a note of an insolvent dissolved corporate maker, for $3ó,000, and as such, with his co-indorsers, is jointly liable therefor to the holder, the defendant, receiver of an insolvent national bank. Plaintiff is also a depositor of the bank in an amount in excess of the sum due on the note. lie has received dividends upon that part of his deposit in, excess of the note liability, the receiver refusing to pay dividends upon the remainder of the deposit until this cause shall be decided. Plaintiff brings suit to compel the receiver to set off, as against his deposit, the amount necessary to discharge the note aforesaid. The receiver asserts that the mutuality necessary to the right of set-off does not exist.

Section 12 of chapter 22 of Act No. 314 of the Michigan Public Acts of 1915, which is popularly referred to as the “Judicature Act,” and was enacted for the purpose of reforming and codifying judicial procedure, reads as follows: “In any action against two or more defendants, judgment may be rendered for the plaintiff against some one or more of the defendants, and also in favor of some one or more of the defendants against the plaintiff, according as the rights and liabilities of the respective parties shall appear, either upon' confession, default, by pleading or on trial; and when judgment shall be rendered in favor of any defendant, he shall recover costs against the plaintiff, in the same manner as though judgment had been rendered for all the defendants; but no judgment shall be entered upon any purely several liability against any party not served with process.”

This statute is practically identical with section 5778 of the Compiled Laws of Michigan of 1872, which was as follows: “In any such action, judgment may be rendered for the plaintiff against some one or more of'the defendants, and also in favor of some one or more of the defendants against the plaintiff, according as the rights and liabilities of the respective parties shall appear, either upon confession, default, by pleading, or on trial; and when judgment shall be rendered in favor of any defendant, he shall recover costs against the plaintiff, in the same manner as though judgment had been rendered for all the defendants.”

The statute remained substantially the same until its amendment in 1915.

It is plaintiff’s contention that the effect of this statute is to permit, in a suit against joint obligors, judgment against any one or more thereof, and thereby, inasmuch as in a suit against the jointly liable indorsers a separate judgment might be rendered against plaintiff, in effect the bank or its receiver has a cause of action against him severally, liability on which should be set off as against his deposit account.

i, Unfortunately there is no clear-cut interpretation of this statute by the Michigan courts, as applied to the present facts. In 1887, in Seligman v. Gray, 66 Mich. 341, 33 N. W. 510; the court said concerning the prior statute that: “ * * * It is well settled law that there must be, in a joint action, a joint judgment, or no judgment at all.”

In Anderson v. White, 39 Mich. 130, in discussing the act of 1872 it was said: “An examination of this section in connection with those preceding it, shows that it has no application to a case like the present, but to cases where the holder of a ‘bill of exchange or promissory note', instead of bringing separate suits against the drawers, makers, guarantors of the payment thereof, indorsers, and acceptor of such bill or note’ includes all or any of the said parties in one action.”

Thus we have a direct statement that the judgment in a joint action must he joint or not at all, and language indicating intent to declare it proper, in an action against different classes of defendants jointly, to render judgment against those of one class. The language of the statute is that in any action “against two or more persons,” judgment may be rendered for plaintiff against one or more defendants “according to the rights and liabilities of the respective parties.” Keeping clearly in mind this language and the expressions of the Michigan Supreme Court, the logical meaning of the statute, I think, is that it was not intended to alter the joint liability of joint obligors; that it preserved liabilities as they then existed, but permitted judgment to be entered against one or more of two or more defendants, whom the evidence should show under existing law were liable. The effect is to obviate the necessity of judgment against all. But I cannot see that it intended to- modify the existing liability of joint debtors so that a several judgment could be entered against one or more who are only jointly liable. The substantive rights of parties were not changed; the judgment must be “in accordance with the rights of the parties,” and no attempt is made to modify those rights.

Plaintiff relies upon the case of Lorimer v. Wayne Circuit Judge, 216 Mich. 587, 185 N. W. 791, 792. In that case, action was brought by plaintiffs against a large number of defendants, constituting the Detroit Coal Exchange, for legal services rendered. Shortly after the suit had been instituted, the plaintiff procured a default against several of the defendants for their nonappearanee, and then proceeded to take a judgment against those defaulted, for the amount demanded. The plaintiff failed to proceed to trial against the remaining defendants. Some three years after judgment against the defaulted defendants as aforesaid, plaintiffs procured to be issued an execution against said judgment debtors, who thereupon filed a motion in the circuit court in the county of Wayne to set aside the judgment as void for its failure to run against all defendants. Upon the circuit court denying the motion, they applied for a writ of mandamus in the Supreme Court. That court, in denying the application, said: “Counsel insist that after Beaumont, Smith & Harris elected to proceed against all [of the defendants] , then that course must be pursued to the end. Our attention is called to the following statute, which, it is- said, justifies the action of plaintiffs in taking judgment against only a portion of the defendants. * * * 3 Comp. Laws 1915, § 12802. This section appears to have changed the old rule contended for by plaintiffs. It appears to authorize the taking of judgment against a part of the defendants, either upon default or on the trial. The section last quoted was a new section with the advent of the Judicature act, and we are persuaded that it was passed for the purpose of enabling a plaintiff to do what was done in this case.”

It should be observed, however, that the cause of action there was joint and several, not merely joint, and the effect of the decision was to hold that judgment might be rendered against a part of all joint and several debtors. In other words, the court believed that the statute so modified the common-law rule that a plaintiff might have judgment against any number of several joint and several defendants instead of only against one or all of such defendants. Any other interpretation of the decision is irreconcilable with the language of the court in the ease of Seligman v. Gray, supra, that “there must be, in a joint action, a joint judgment, or no-judgment at all,” which stands as the decision of the court under an earlier, substantially similar statute, unmodified and unreversed. That the court was dealing with a dissimilar situation in the ease of Lorimer v. Wayne Circuit Judge, supra, is apparent from the language, “Having decided that the contract sued upon is a joint and several one, plaintiffs cannot complain that judgment was. not taken against some other defendant.” It follows that the Michigan statute does not create a severable liability against plaintiff which he may set off as against his individual. deposit.

Plaintiff insists also that, independent of the Michigan statute, equity with its inherent right to produce equitable results will, when the circumstances warrant, depart from the general rule and force a set-off of a joint debt against a several debt (57 Corpus Juris, p.. 361, § 4; p. 46-2, § 117; Wolff v. Jasspon, 126 Mich. 11, 85 N. W. 260; Scott v. Armstrong, 146 U. S. 499, 13 S. Ct. 148, 36 L. Ed. 1059), and that the facts here are such as to bring the present case within such exception. The true rule in such cases is thus-stated by the Supreme Court in Scammon v. Kimball, 92 U. S. 362, 367, 23 L. Ed. 483. In that case, the court stated:

“Whether the suit be one at law or in equity, set-off must be understood as that right which exists- between two parties, each of whom, under an independent contract, owes. an ascertained amount to the other, to set off their respective debts by way of mutual deduction, so that, in any action brought for the larger debt, the residue only, after such deduction, shall be recovered. * * *

“Courts of equity, following the law, will not allow a set-off of a joint debt against a separate debt, or of a separate debt against a joint debt; nor will such courts allow a set-off of debts accruing in different rights, except under very special circumstances, and where the proofs are clear and the equity is very strong.”

In Gray v. Rollo, 18 Wall. (85 U. S.) 629, 632, 21 L. Ed. 927, the same court said: “Courts of equity, following the law, will not allow a set-off of a joint debt against a separate debt, or conversely, of a separate debt against a joint debt; or, to state the proposition more generally, they will not allow a set-off of debts accruing in different rights.”

In the present ease we have clearly only a joint liability which plaintiff wishes set off against his several deposit. True the primary debtor, the maker, is insolvent; but the other joint debtors are solvent. The right to demand contribution against his joint codebtors exists in favor of plaintiff in ease he pays or otherwise procures satisfaction of the debt. I find in these facts no special circumstances justifying me in concluding that the case is within any recognized exception to the general rule governing equitable set-off.

Apparently opposed to my conclusion in this regard is Clark v. Sullivan, 2 N.D. 103, 49 N. W. 416, 13 L. R. A. 233, but there, it is intimated, the joint codebtor as well as the maker was insolvent. Furthermore, the court was there dealing with the subject-matter of liabilities of sureties, whose rights are especially tenderly regarded by courts of equity. If the case is to be regarded as applicable to the facts here, I regret that I cannot agree with its-conclusion. That the fact that one of the joint debtors is surety for the others creates a different situation in equity is ap^ parent from the language of the Supreme Court in G-ray v. Rollo, supra, where it is said: “So, if one of the joint debtors is only a. surety for the other, he may, in equity, set off the separate debt due to his principal from the creditor; for in such a case the joint debt is nothing more than a security for the separate debt of the principal. * * * ”

It follows that the bill must be dismissed for want of equity at plaintiff’s costs. Execution for same is awarded. Proper decree may be submitted.


author: McMILLAN, District Judge.

text:
    STATE LIFE INS. CO. v. DANIEL et al.
    No. 1359.
    District Court, W. D. Texas, Austin Division.
    May 11, 1934.

      Charles F. Coffin, of Indianapolis, Ind., and Hart, Patterson & Hart, of Austin, Tex., for plaintiff.
    James V. Allred, Atty. Gen. of Texas, and Sidney Benbow, Asst. Atty. Gen. of Texas, for defendants.
   McMILLAN, District Judge.

In this ease the plaintiff, the State Life Insurance Company, by amended original petition, complains of R. L. Daniel, acting as commissioner of insurance of the state of Texas, Charles Lockhart, acting as treasurer of the state of Texas, and James V. Allred, acting as Attorney General of the state of Texas. Plaintiff alleges that it is a life insurance corporation chartered under the laws of the state of Indiana, and a citizen of that state; that the defendants are, each and all of them, citizens of the state of Texas, and reside in Travis county in that state. Plaintiff sues for the purpose of recovering the sum of $5,450.87 which it alleges it paid to the commissioner of insurance by reason of an illegal exaction made on it under the col- or of article 4769 of Vernon’s Annotated Civil Statutes, Revision of 1925, providing, substantially, for the payment of an occupation tax equal to 3 per cent, of the gross premiums collected from the citizens of the state of Texas. It is further alleged that this money was paid under protest and that same has been and is now being held in a certain “suspense account” provided for by the laws of Texas, ¿waiting the determination of the title thereto as provided by said suspense statute.

At the threshhold the plaintiff is met by a plea in abatement which raises the question of the jurisdiction of this court to hear and determine the matter, and it is the matter of this preliminary plea to the jurisdiction which is now before the court for determination.

The point which the defendants rely on to sustain their contention is, that while the suit is nominally brought against them in their various capacities as officers of the state, the ease is in truth and in fact one against the state of Texas itself; that while permission is given by the suspense statute, as will be hereinafter noted, to institute a suit of this character, the effect of the asserted fact that the suit is against the state is to confine the litigation to the state courts, this result necessarily following by reason of the fact that there is no diversity of citizenship if the state is really the party at interest.

It is apparent upon the face of the pleadings that the necessary jurisdictional amount is involved and that complete diversity of citizenship exists, unless the defendants’ contention that the state is the real party defendant is correct. It is fundamental, of course, that the state cannot be sued without its consent. Even though its consent be given, no one .disputes the proposition that it is not a citizen within the contemplation of the diversity of citizenship provision of the Judicial Code (section 24 [28 USCA § 41]). State of Minnesota v. Northern Securities Co., 194 U. S. 48, 24 S. Ct. 598, 48 L. Ed. 870; State Highway Commission of Wyoming v. Utah Construction Co., 278 U. S. 194, 49 S. Ct. 104, 73 L. Ed. 262; Utah Construction Company v. State Highway Commission (D. C.) 16 F.(2d) 322.

Accordingly, the matter hinges here upon the question as to whether this is in truth and in fact a suit against the state of Texas, or whether it is against officers of the state who have made an illegal exaction of the plaintiff under the color of their official positions.

To arrive at a proper determination of this matter consideration must be given not only to the general principles announced by the federal courts, but to the so-called suspense statutes of the state of Texas. As early as 1930, the Legislature of the state, by amendatory statute (Acts Tex. 1930, 5th Called Sess., c. 73, § 3), provided for the holding in suspense of any moneys paid under protest -until the exact status of the same was determined. The statute was couched in very general terms, and questions early arose as to its sufficiency to accomplish the desired purpose. Thereafter, in 1931 (Vernon’s Ann. Civ. St. Tex. axt. 4388), this statute was amended and amplified. The question as to its sufficiency still remaining, in 1933 a much more complete statute was passed, which became effective on June 7th of that year. This statute is covered by article 7057b, Vernon’s Ann. Civ. St. Tex., and, so far as the same is pertinent to the matter at issue here, it is copied in the footnote.

It will be observed from a casual reading of this act that the state, taking notice of the fact that taxpayers were being required by officers of the state to make payments which they believed to be unlawful, desired to effect an arrangement by which payments could be made without waiver, the right being accorded -to institute suit within ninety days against the officer who made the eollection and the Attorney General and the treasurer for the purpose of determining the va/lidity of the exaction. Pendente the final adjudication of .the matter, the fund is to be held in suspense by the state treasurer, and should it finally be determined that the money belongs to the state, it is to be covered into the state treasury, and should it finally be determined to belong to the taxpayer, it is to be returned to him with pro rata interest earned.

It will be noted that provision is made for suit in any court of competent jurisdiction in Travis county, Tex., the statute making no provision as to whether the court should be state or federal, as distinguished from statutes in which other states have required litigation of this kind to be brought only in the state courts.

Plaintiff in the present ease has sought to avail itself of the provisions of this act by paying this occupation tax under protest and bringing this suit against the proper officers in Travis county, Tex., within the required ninety days. It has long been settled that suits against state officers attempting to enforce an unconstitutional statute or attempting to enforce a valid statute in an illegal manner are not suits against the state. Reagan v. Farmers’ Loan & Trust Co., 154 U. S. 362, 14 S. Ct. 1047, 38 L. Ed. 1014; Ex parte Young, 209 U. S. 159, 28 S. Ct. 441, 52 L. Ed. 714, 13 L. R. A. (N. S.) 932, 14 Ann. Cas. 764; Greene v. Louisville & Interurban R. R. Co., 244 U. S. 499, 37 S. Ct. 673, 61 L. Ed. 1280. In eases in equity where relief has been asked against state officers under these circumstances, this rule has been uniformly applied by the federal courts.

Accordingly, in this ease had the plaintiff elected to maintain a bill in equity against these state officers to enjoin the collection of this tax, the bill could not have been resisted upon the ground it was a suit against the state, and, if the allegations were otherwise sufficient, would have been maintainable, unless it could have been defeated by the provisions of this recent suspense statute. It is the .opinion of the court that it was the obvious purpose of this statute to avoid equity jurisdiction in cases of this character and to provide for the aggrieved taxpayer an adequate remedy at law. Even prior to the passage of the act of 1933, the Attorney General’s department, in the ease of Southern Realty Corporation v. McCallum (D. C.) 1 F. Supp. 614; Id. (C. C. A.) 65 F.(2d) 934, which finally found its way to the Supreme Court of the United States (Southern Realty Corporation v. Heath, 54 S. Ct. 127, 78 L. Ed. -) contended that the earlier suspense statute constituted such adequate remedy at law as would defeat the right to appeal to a court of equity. This point was ruled against them by the lower court on the ground that the statute as it then existed was inadequate, particularly in view of the fact that it did not provide for a return of the money with interest. Southern Realty Corporation v. McCallum (D. C.) 1 F. Supp. 614. Had the statute provided an adequate remedy at law, it would have defeated the suit in equity, as is clearly shown by the decisions of the Supreme Court in the Matthews Case, 284 U. S. 521, 52 S. Ct. 217, 76 L. Ed. 447, and the Stratton Case, 284 U. S. 530, 52 S. Ct. 222, 70 L. Ed. 465.

Now an adequate remedy at law within the purview of federal procedure not only means an adequate remedy in the state courts but an adequate remedy in the federal courts as well. Arrowsmith v. Gleason, 129 U. S. 86, 9 S. Ct. 237, 32 L. Ed. 630; Smyth v. Ames, 169 U. S. 466, 18 S. Ct. 418, 42 L. Ed. 819; Risty v. Chicago, Rock Island & Pacific R. R. Co., 270 U. S. 378, 46 S. Ct. 236, 70 L. Ed. 641; Matthews v. Rodgers, 284 U. S. 521, 52 S. Ct. 217, 76 L. Ed. 447; City Bank Co. v. Schnader, 291 U. S. 24, 54 S. Ct. 259, 78 L. Ed. -. Accordingly, it is perfectly obvious that if the contention of the Attorney General in this case be correct, namely, that this is a suit against the state, and that while the state has by the suspense statute given permission to bring the suit, it can be maintained only in the state courts, the purpose of the statute has been defeated and an adequate remedy at law which would forestall the maintenance of an action in equity to restrain the collection of this tax has not been provided. The statute should be construed with a view to effecting the object of its enactment and it is manifest that to construe it as contended for by the defendants would be to defeat the legislative purpose.

In arriving at this conclusion the court has not overlooked the case of Smith v. Reeves, 178 U. S. 436, 20 S. Ct. 919, 920, 44 L. Ed. 1140, much relied on by defendants. That ease, while similar in its subject-matter' to the one at bar, is easily distinguished. There a California suspense statute was under consideration, and there the money exacted was at once paid into the state treasury and treated as the property of the state. It was mingled with other moneys owned by the state and claimed by the state, and the court, in passing upon the matter, held that despite the fact that the action was against a state official the state was in truth and in fact the party at interest. However, in determining this point the court makes this very significant statement:

“This ease is unlike those in which we have held that a suit would lie by one person against another person to recover possession of specific property, although the latter claimed that he was in possession as an officer of the state and not otherwise. In such a case, the settled" doctrine of this court is that the question of possession does not cease to be a judicial question — as between the parties actually before the court — because the defendant asserts or suggests that the right of possession is in the state of which he is an officer or agent. Tindal v. Wesley, 167 U. S. 204, 221, 17 S. Ct. 770, 42 L. Ed. 137, 143, and authorities there cited. In the present ease the action is not to recover specific moneys in the hands of the state treasurer, nor to compel him to perform a plain ministerial duty. It is to enforce the liability of the state to pay a certain amount of money on account of the payment of taxes alleged to have been wrongfully exacted by the state from the plaintiffs.”

This statement by the court applies peculiarly to the Texas statute. Sections 3 and 4 of article 7057b evidence clearly the legislative intention that money paid by the taxpayer under protest shall be segregated and held as a fund apart until the title to it is determined. To hold otherwise would be to overlook such significant provisions as these:

“Upon the receipt of such money by the State Treasurer it shall be his duty and he is hereby required to immediately and forthwith place the same in State depositories bearing interest in the same manner as any other funds of the State required to be placed in such depositories at interest, and the State Treasurer shall further be required to allocate whatever interest is earned on such funds and to credit the amount thereof to such suspense account until the status of such money is finally determined as herein provided.” Section 3.

“ * * * Or in the event it finally be determined in such suit that the sums of money so paid or any portion thereof, together with the pro rata interest earned thereon, belong to the State, then and in that event it shall be the duty of the State Treasurer to transfer such money from the suspense account to the proper fund of the State by placing the portion thereof belonging to the State in such fund by the issuance of a deposit warrant. * * '' In the event, however, that suit is brought by such taxpayer within the time and within the manner hereinabove provided, and it be finally determined that such money so paid by such taxpayer, or any part thereof, was unlawfully demanded by such public official and that the same belongs to such taxpayer, then and in that event it shall be the duty of the State Treasurer to refund such amount, together with the pro rata interest earned thereon. * * *” Section 4.

It is perfectly apparent in the light of the history of the statute and its wording that the present action is one to recover specific money, impounded by statute in the hands of state officers, alleged to have been illegally exacted, and which has not been eqmmingled with the funds of the state and to which the state does not assert title other than as -limited by the provisions of the suspense statute.

The very recent decision of the Supreme Court in City Bank Co. v. Schnader, 291 U. S. 28, 54 S. Ct. 259, 260, 78 L. Ed. -, directly sustains the views which have been expressed. There, in discussing a‘ somewhat different statute passed by the state of Pennsylvania relative to taxes paid under protest, the court says:

“It is conceded that neither the statutes of Pennsylvania nor the decisions of its courts permit an action at law for the recovery of a tax paid under protest. If that procedure were permissible in the state courts, the appellant could pursue the same remedy in a federal court; there being the requisite diversity of citizenship and amount in controversy. Matthews v. Rodgers, 284 U. S. 521, 52 S. Ct. 217, 76 L. Ed. 447.”

It is the opinion of the court that the plea to the jurisdiction should be overruled.

       “Art. 7057b. Sec. 1. Any person, firm or corporation who may be required to pay to the head of any department of the State Government any occupation, gross receipt, franchise, license or other privilege tax or fee, and who believes or contends that the same is unlawful and that such public official is not lawfully entitled to demand or collect the same shall, nevertheless, be required to pay such amount as such public •official charged with the collection thereof may deem to be due the State, and shall be entitled to accompany such payment with a written protest, setting out fully and in detail each and every ground or reason why it is contended that such demand is unlawful or unauthorized.
      “Sec. 2. Upon the payment of such taxes or fees, accompanied by such written protest, the taxpayer shall have ninety (90) days from said date within which to file suit for the recovery thereof in any court of competent jurisdiction in Travis County, Texas, and none other. Such suit shall be brought against the public official charged with the duty of collecting such tax or fees, the State Treasurer and the Attorney General. The issues to be determined in such suit shall be only those arising out of the grounds or reasons set forth in such written protest as originally filed, The right of appeal shall exist as in other cases provided by law. Provided, however, where a class action is brought by any taxpayer all other taxpayers belonging to the class and represented in such class action who have properly protested as herein provided shall not be required to file separate suits but shall be entitled to and governed by the decision rendered in such class action.
      “Sec. 3. It shall be the duty of such public official to transmit daily to the State Treasurer all money so received, with a detailed list of all those remitting same, and he shall inform the State Treasurer in writing that such money was paid under protest as hereinabove provided. A deposit receipt shall be issued by the Comptroller for the daily total of such remittances from each department; and the cashier of the Treasury Department shall keep a cash book to be called “Suspense Cash Book,” in which to enter such deposit receipts. Upon the receipt of such money by the State Treasurer it shall be his duty and he is hereby required to immediately and forthwith place the same in State depositories bearing interest in the same manner as any other funds of the State required to be placed in such depositories at interest, and the State Treasurer shall further be required to allocate whatever interest is earned on such funds and to credit the amount thereof to such suspense account until the status of such money is finally determined as herein provided.
      “Sec. 4. If suit is not brought within the time and within the manner herein provided, or in the event it finally be determined in such suit that the sums of money so paid or any portion thereof, together with the pro rata interest earned thereon, belong to the State, then and in that event it shall be the duty of the State Treasurer to transfer such money from the suspense account to the proper fund of the State by placing the portion thereof belonging to the State in such fund by the issuance of a deposit warrant. When such deposit warrant or warrants are issued, they shall be entered in the cash book, and the proper fund to which such money is so transferred shall be properly credited therewith. In the event, however, that suit is brought by such taxpayer within the time and within the manner herein-above provided, and it be finally determined that such money so paid by such taxpayer, or any part thereof, was unlawfully demanded by such public official and that the same belongs to such taxpayer, then and in that event it shall be the duty of the State Treasurer to refund such amount, together with the pro rata interest earned thereon, to such taxpayer by the issuance of a refund warrant, the same to be issued in separate series and to be used for making such refunds, to be styled and designated ‘Tax Refund Warrants’ and such warrants shall be written and signed by the Comptroller and countersigned by the State Treasurer and charged against the suspense account, as hereinabove provided, and shall then be returned to the Comptroller and delivered by him to the persons entitled to receive the same.”


author: BARRES, District Judge.

text:
    McDONOUGH v. PACIFIC STATES LIFE INS. CO.
    No. 13446.
    District Court, N. D. Illinois, E. D.
    Oct. 19, 1933.
    Thomas J. Courtney, State’s Atty., and William Kearney, Asst. State’s Atty., both of Chicago, 111., for county treasurer.
    E. R. Elliott, of Chicago, Ill., for Pacific States Life Ins. Co.
   BARRES, District Judge.

This cause came on to he heard on the motion of the defendant for an order restraining the further prosecution of proceedings in the county eourt of Cook county, whence this cause was removed to this court, and on the motion of the plaintiff to remand the cause to the county court of Cook county.

The proceeding is one by the county treasurer and; ex officio county collector of Cook county against Pacific States Life Insurance Company for the appointment of said county treasurer and ex officio county collector receiver of certain real property of the defendant. The proceeding is brought under the so-called Skarda Act, which was recently adopted by tbe General Assembly of the state of Illinois. Tbe Skarda Act provides:

“That at any time after any taxes or any installment thereof heretofore or hereafter levied and assessed upon real property shall have been delinquent for more than six months and remain due and unpaid in any county, the county collector may make application to any court of competent jurisdiction, by bill or by petition, to be appointed receiver ex-offieio of the rents, issues and income of such real property for the purpose of collecting and satisfying, out of such rents, issues and income, the taxes upon such real property, together with the penalties, interest and costs, and such hosts and expenses of the receivership as may be adjudged by the court.” (Smith-Hurd Rev. St. Ill. 1933, c. 120, § 238a, Cahill’s Ill. Rev. St. 1933, c. 120, p. 2348, § 268 (1).

The eourt is of the opinion that the proceeding in the county eourt is not a “suit of a civil nature, at law or in equity, of which the district courts of the United States are given jurisdiction” within the meaning of USCA title 28, § 71, and that, accordingly, the proceeding is not removable to this court. The proceeding in the county court was “a matter of administration, and the duties of the tribunal are administrative, and not judicial in tbe ordinary sense of that term, though often involving the exercise of quasi judicial functions.” Upshur County v. Rich, 135 U. S. 467, 471, 10 S. Ct. 651, 652, 34 L. Ed. 196.

The eourt is also inclined to think that the real plaintiff in the suit in the county court is the state of Illinois, and that, accordingly, there is no diversity of citizenship. State Highway Comm. v. Utah Const. Co., 278 U. S. 194, 49 S. Ct. 104, 73 L. Ed. 2162. The right involved in the proceeding in the county eourt is the right to tax. That right is a part of the sovereign power of the state of Illinois. It is true that some of the taxes may he for the county, city, schools, high schools, sanitary district, parks, and other purposes, and it is possible that none of the 'taxes involved are so-called state taxes, but, 'nevertheless, the power involved in the assessment and collection of the taxes, whether it be state taxes or county taxes or school or park taxes, is a part of the sovereign power of the state. There may he some doubt on this proposition, and the eourt is not deciding the ease on this point, but on tbe first point tbe court has no doubt that the proceeding is not removable.

Accordingly, the motion of the defendant for an order restraining the proceedings in the county eourt will be denied and the motion of the plaintiff for an order remanding the proceeding to the county eourt will be granted.