Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; James H. Wilkerson, Judge.
Before ALSCHULER and SPARKS, Circuit Judges, and WHAM, District Judge.
Section 67e of the Bankruptcy Act of 1898, as amended (11 USCA § 107(e), provides that, if a debtor, within four months of the filing of the petition in bankruptcy, makes any transfer or assignment "with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them," such transfer or assignment shall be null and void except as to purchasers in good faith and for a present fair consideration, and it shall be the duty of the trustee to recover the same.
That the assignment by the bankrupt to the appellant of the sum in controversy was made within four months prior to the filing of the petition in bankruptcy is admitted and not in controversy. That the bankrupt was insolvent on said date cannot be questioned, if the claims of the Export Company and the Milwaukee Company filed and allowed against the estate of the bankrupt in United States District Court of Oregon, were valid claims. Appellant, being in no way a party to that proceeding and not having intervened or entered its appearance therein, is not bound by the allowance of the claims in that court, but the burden in this case rests upon appellee to prove the validity of those claims against the bankrupt before they can be considered here as affecting the solvency of the bankrupt. Gratiot County State Bank v. Johnson, 249 U.S. 246, 39 S. Ct. 263, 63 L. Ed. 587.
Appellant insists that the evidence shows that the bankrupt had no debts to the Milwaukee Company and the Export Company aside from those of $30,319.80 and $40,441.71, respectively, which were paid from the proceeds of the sale to the Pine Company, and that the bankrupt was, in fact, solvent on September 15, 1928; that the transactions upon which are based the claims for the additional sums of $526,764.86 and $70,000 which the court below found to be due from the bankrupt to the Milwaukee Company and the Export Company, respectively, were transactions, not between those companies and the bankrupt, but entirely between said companies and Fred Herrick, individually; that the money, funds, and credits represented by said sums were advanced to Fred Herrick individually by said companies, and he, solely, is liable therefor to the Milwaukee and Export Companies; that, if he advanced such money, funds, and credits to the bankrupt, or caused the same to be used for its benefit, he did so after the same had become his individual assets and the bankrupt became indebted solely to him; that the bankrupt has paid Fred Herrick in full for the moneys and funds so advanced by him.
The appellant's contentions in this respect are not upheld by the facts disclosed by the evidence. Fred Herrick owned substantially all the stock in, was president of, and dominated each of said three corporations. Taking advantage of this situation, he used, or caused to be used, the funds of the Milwaukee Company and the Export Company to pay the expenses of and carry on the construction work of the bankrupt. The assets sold by the bankrupt to the Pine Company were paid for in no small measure by the money thus diverted to the bankrupt from those companies. Not only did Fred Herrick, as president of bankrupt, divert the funds from said companies to the bankrupt, but the other officers of the bankrupt had sufficient knowledge of the source of the funds to put them on notice that they were not in fact the personal funds of Fred Herrick, but were being diverted by him from the Milwaukee Company and the Export Company. The situation disclosed by the evidence is well stated by the court below, as follows: "The rule which would enable to Herrick Lumber Company to receive through its president this money which he had taken wrongfully from other companies controlled by him and obtain the benefit of the use of the money without being chargeable with the president's knowledge as to real ownership of the funds so diverted, is repugnant to equity. Moreover, aside from the president's knowledge, the real character of the transactions with the Milwaukee and Export companies was brought home to the Herrick Lumber Company by circumstances which put it on inquiry and precluded it from closing its eyes and saying that it did not know what could easily have been found out."
The corporation receiving the benefit of the wrongfully diverted funds became the debtor of and liable for such funds to the corporations from which the funds were diverted. Brown v. Pennsylvania Canal Co. (D.C.) 229 F. 444, affirmed 235 F. 669 (C.C.A. 3); McMillan v. National Wool Warehouse & Storage Co., 28 F.2d 793 (C.C.A. 9); Guay v. Holland System Hull Co., 244 Mass. 240, 138 N.E. 557; Corey et al. v. Independent Ice Co., 226 Mass. 391, 115 N.E. 488.
The fact that the bankrupt gave credit on its books to Fred Herrick for the funds at the time they wre used for its benefit and subsequently permitted him to use or withdraw part or all thereof for personal uses cannot affect bankrupt's liability to the corporations from which the funds were wrongfully diverted for the bankrupt's benefit.
The contention that the claims were barred by the laches of the Milwaukee Company and the Export Company cannot be maintained, in view of the fact that the actions of those companies were at all times controlled by Fred Herrick who, for his own selfish purposes, diverted the funds in question from them to the use of the bankrupt. Young v. Columbia Land Co., 53 Or. 438, 446, 99 P. 936, 101 P. 212, 133 Am. St. Rep. 844.
The claims in question, approximating a total of $600,000, being valid subsisting claims against the bankrupt on September 15, 1928, the bankrupt was unquestionably insolvent and the officers and directors of the bankrupt, knowing or having had notice of the indebtedness, must be held to have had knowledge of the bankrupt's insolvency.
Not only was the bankrupt insolvent at the time of the assignment in controversy with the knowledge lof its officers and directors, but they authorized and made the assignment, not for the benefit of the bankrupt, but for the personal benefit of Fred Herrick, president of the bankrupt. In the transaction their sole purpose was to gain control of Fred Herrick's personal guaranty of the Coeur d'Alene notes held by appellant to forestall threatened action thereon against Fred Herrick. The evidence shows that the notes of the Coeur d'Alene Company in themselves were of little or no value, and the officers and directors of the bankrupt knew this. The financial condition of the Coeur d'Alene Company had been steadily growing worse, its plant had been or was about to be closed down, its assets were mortgaged to the approximate limit of their then value, and as early as April or May, 1928, J. W. Girard, and officer and director of the bankrupt and active manager of the coeur d'Alene Company, had informed H. P. Snyder, a vice president of appellant, who had gone to Idaho to investigate the possibilities of collecting the notes, of the desperate financial condition of the company, and that the notes held by appellant could never be paid by the company. They also knew that Fred Herrick was financially embarrassed, could not pay all of his debts and that he would be in control of his guaranty of said notes if acquired by the bankrupt. The inevitable effect of the assignment by the bankrupt of $125,000 in cash for the notes and guaranties on September 15, 1928, under the circumstances, was to hinder, delay, and defraud the bankrupt's creditors. Its officers and directors having authorized and made the assignment with knowledge of the facts and circumstances disclosed by the evidence as above set forth, it must be held to have intended the necessary consequences of their acts, which were to hinder, delay, and defraud its creditors. Dean v. Davis, 242 U.S. 438, 443, 37 S. Ct. 130, 61 L. Ed. 419; Lovett v. Faircloth, 10 F.2d 301 (C.C.A. 5).
To render null and void under section 67e of the Bankruptcy Act a conveyance, transfer, or assignment made by a bankrupt with intent to delay, hinder, or defraud its creditors, except as to purchasers in good faith and for a present fair consideration, it is not necessary to prove that such intent was shared by the transferee. Bankruptcy Act, § 67e, 11 USCA § 107 (e); Sherman v. Luckhardt, 67 Kan. 682, 72 P. 277; In re Brown (D.C.) 291 F. 430, 433; Remington on Bankruptcy (3d Ed.) vol. 4, § 1931, pp. 775, 776; Collier on Bankruptcy (13th Ed.) vol. 2, p. 1559.
The burden was on the appellant, if it would save the transaction under said section 67e, to prove that it was a purchaser in good faith and for a present fair consideration. Remington on Bankruptcy (3d Ed.) vol. 4, §§ 1931, 1933.Appellant has failed to meet this burden. It deliberately created the immediate situation that caused the formation of the fraudulent intent on the part of the officers and directors of the bankrupt. After the fraudulent intent on their part became apparent to the appellant by their offer wrongfully to purchase the Coeur d'Alene ...