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11 F.(20) 404 contractor without the consent of the sureties "Where there are privies in a contract before the completion of the whole work." with the knowledge of a debtor to secure to (Italics by the writer of this opinion.) his creditor the payment of a debt, the pay

And again, in the case of Henningsen v. ment of it by any one of them other than Fidelity & Guaranty Co., 28 S. Ct. 389, 391, the debtor is a payment at his request, and is 208 U. S. 404 at page 410 (52 L. Ed. 547), an express assumpsit to reimburse the the Supreme Court, having under considera- amount. Where the surety of a surety pays tion another controversy between a surety the debt of a principal, under a legal obligaand a bank over the balance due upon a con- tion, from which the principal was bound to tract for the performance of government relieve him, such a payment is a sufficient work, said:

consideration to raise an implied assumpsit "Henningsen, for we may leave Clive out to repay the amount, although the payment of consideration, entered into a contract with was made without a request from the printhe United States to construct buildings. The cipal.” Hall v. Smith, 5 How. 96, 12 L. Ed. Guaranty Company was surety on that con- 66. tract. Its stipulation was not merely that [7] So I think is clear that the action in the contractor should construct the buildings, this case, as between the plaintiff and Casey, but that he should pay promptly and in full is one which might have been brought here all persons supplying labor and material in because of the diversity of citizenship of the the prosecution of the work contracted for. parties, and that this is determinative of the He did not make this payment, and the Guar- question before the court. anty Company, as surety, was compelled to If the petitioner has stated a cause of acand did make the payment. Is its equity tion against the school board, it is by virtue superior to that of one who simply loaned of rights growing out of the relation created money to the contractor to be by him used by the contract and bond, together with the as he saw fit, either in the performance of his legal and equitable subrogation which the building contract or in any other way? We law affords, notwithstanding the conventionthink it is. It paid the laborers and mate- al assignments. Besides the legal and equirialmen and thus released the contractor table principles heretofore discussed, all of from his obligations to them, and to the same the defendants in this case are charged with extent released the government from all equi- fraud and collusion, which as to some of table obligations to see that the laborers and them amounts to an allegation of breach of supplymen were paid. It did this not as a contract, and as to others the commission of volunteer but by reason of contract obliga- a tort in inducing the violation of these contions entered into before the commencement tractual rights, as well as the taking and reof the work."

ceiving of a fund upon which the plaintiff [6] As between the surety and its principal, had a superior lien and claim. As to the the right of the former to recover of the lat- duty of the creditor who has received secuter money paid to discharge claims of ma- rity (and in this case the school board was terialmen and laborers arises in assumpsit,' undoubtedly. the creditor of Casey for the as for money paid, and the fact that the said performance of the obligations of his conclaimants may have conventionally assigned tract, and the retention of a percentage of their claims to the surety does not change the the price was in the nature of additional secharacter of the right.

curity for that purpose), it is stated by Cyc., "The action by the surety against his abundantly supported by authority, that: principal for indemnity is brought on the "The creditor, having received property contract implied by law, and this is true not- of the principal, must account for it; it being withstanding the fact that a formal assign- his duty to appropriate such property and ment of the claim has been made by the credi- any profits therefrom to the debt for which tor either to the surety or to a third person. the security was given. If the creditor The form of the action is assumpsit for mon- fraudulently incumbers or conceals the propey paid, or a special action on the case, the erty of an insolvent principal, or, having reclaim for reimbursement being a purely le- ceived security for the debt for which the , gal one, enforceable only by action, in the ab- surety is bound, applies it to a purpose othsence of special circumstances. An express er than the satisfaction of that debt, the surecontract of indemnity between the surety and ty is discharged to the extent of the value of the principal does not preclude a suit on the the security misapplied.” Cyc. vol. 32, p. implied contract." Cyc. vol. 32, pp. 261-262, 321. verbo "Principal and Surety," and author- [8] In this case, however, the surety's obliities cited in footnote.

gation to laborers and materialmen was such

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that it could not be discharged by the conductant, under which a commercial credit of $15,of the owner, and it had therefore to pay 000 was to be allowed, and this sum was imtheir claims; hence I think it must follow, mediately borrowed. In late March or early almost as a corollary, that, if it could not be April a further loan of $5,000 was made in discharged from those obligations, then it connection with certain manufacturing activhad a right of action against the owner for ities of the Stearns Company. About $11,the wrongful conversion of the security. 000 of accounts receivable were assigned by

My conclusion is that the plea to the ju- the Stearns Company to the trust company risdiction is without merit, and the same is as security for this and the other loans. All accordingly overruled.

the notes were made by the Stearns Company and indorsed by Battey and by Welch. About May 16th the trust company

learned that sums collected by the Stearns Com

pany on the assigned accounts had not been OLMSTEAD V. MASSACHUSETTS TRUST

paid over to it. Welch was called to the trust CO.

company and had an interview with Mr. (District Court, D. Massachusetts. February Whittaker, one of its vice presidents. I do 24, 1926.)

not gather that there was any feeling on the No. 2145.

part of the trust company that the managers Bankruptcy Om 167—Bank, receiving payment of the Stearns Company had been dishonest of insolvent partnership's note from partner in what had been done.

There appears to indorser, who protected himself by taking have been some misunderstanding about the firm's assets, held not to have received un

matter. The upshot of the interview was lawful preference.

that the assignment of the accounts receivWhere bank, holding notes of insolvent's

able of April 5th was discharged, and a new partnership indorsed by partners, on learning of firm's condition, called on financially re- assignment, dated May 16th, of accounts responsible partner for payment of notes soon ceivable aggregating about $17,000 (includmaturing, and partner gave bank his personal ing one of $11,000, due from Battey) was note, to be paid in installments, and left proceeds thereof with bank's collection depart- made as security for the trust company's ment to be applied on firm's notes, held no un- loans to the Stearns Company. lawful preference resulted, though bank may Shortly afterward Battey called on Whithave known that such partner protected him.

taker and said that the Stearns Company was self by taking assets of firm.

liquidating its affairs, and that he wished In Equity. Suit by James M. Olmstead, without saying that Battey had suggested his

Whittaker to get in touch with Welch, but trustee in bankruptcy of the C. S. Stearns

doing so.

Whittaker and Welch had an inShoe Company, against the Massachusetts terview, at which Welch confirmed Battey's Trust Company. Bill dismissed.

statements, and said that all the shoes owned Clarence A. Barnes and White & Barnes, by the Stearns Company had been shipped all of Boston, Mass., for plaintiff.

to Battey at Hartford, that it had no other Harry H. Ham, Ralph H. Willard, and property except its accounts receivable, Ham, Willard & Taylor, all of Boston, Mass., which were of a face value of about $50,000, for defendant.

that its debts did not exceed about $35,000,

and that it had an equity in the business of MORTON, District Judge. This is a suit the difference. Whittaker expressed surprise in ity by the trustee in bankruptcy of the that the concern which he had supposed was C. S. Stearns Shoe Company to recover going ahead profitably and had good prosabout $13,000, alleged to have been received pects should go into liquidation. He evidentby the defendant as a preference. It was ly felt that the trust company's position needheard in open court largely on oral testimony. ed strengthening, and called in Battey for There is but little controversy about the facts. another interview, which took place on May The Stearns Shoe Company was organized 28th. in 1921, succeeding a partnership composed At that time Battey gave a demand note of Battey & Welch. It dealt in shoes at for $13,079 to the Trust Company, agreeing wholesale. Battey was a Hartford business to pay it at the rate of $1,000 a week. The man, who ran several retail shoe stores. proceeds of this note Battey left with the Welch was a Boston lawyer, who attended to trust company in its loan department, to be the active business of the company. In the applied to the Stearns Company notes inearly part of 1923 the Stearns Company dorsed by him as they became due. There made banking arrangements with the defend- were at that time five such notes held by the



11 F.(2d) 410 trust company, viz. two for $5,000 and three to believe that the arrangement of May 28th for $3,000, none of them as yet due. The had any ulterior purpose, or was in fact othtrust company applied the proceeds of this er than Mr. Whittaker describes it. All the note ($13,079) in payment of the above-men- notes of the Stearns Company which the tioned notes as they fell due, and thereafter trust company held were indorsed by Battey held those so paid for Battey as the indorser and Welch. The conduct of the parties inwho had paid them. Certain amounts receive dicates that Welch was not regarded as haved from the assigned accounts were also ap- ing any financial strength, but that Battey plied on the notes, but these were relatively was and did. Mr. Whittaker testifies that small, and do not enter into the present con- the trust company did not know much about troversy.

the business of the Stearns Company, but Battey died in August, 1923, after mak- had confidence in the two men who were runing eight payments, of $1,000 each, on the ning it. When he learned, late in May, from $13,079, note. The trust company brought Welch, just what the condition of affairs was, suit against his estate in Connecticut, and he called upon Battey as indorser to take care recovered practically the entire balance due of the notes which would shortly become due, to it; the case being settled by throwing off a and made the arrangement above described. few hundred dollars, which the trust compa- While he is, of course, an interested witness, ny lost, and it also was out of pocket its le- he ought not to be discredited, and his testigal fees. It received in all approximately mony rejected on mere suspicion, without $19,000. There was also litigation in Con- sufficient reason therefor. The notes were necticut between the receiver of the Stearns unquestionably good when made, and it Company and Battey's estate, the nature of seems to me to have been the not unusual case which does not appear with clearness and of an indorser on the notes of a liquidating certainty. On or about May 28th Battey ap- concern being called upon to take up the pears to have been indebted to the Stearns notes as they fell due, and to have arranged Company for about $20,000 for the shoes to do so by leaving sufficient funds for that which had been shipped to him. This fact purpose in the hands of the bank. Battey was known to Mr. Whittaker.

may have protected himself by taking propThe Stearns Company's debts were over erty of the insolvent maker, but that is not $40,000. The book accounts realized only the present question. Even if the trust comabout $2,500, including sums collected both pany knew that Battey had taken all the asby the trust company and by the receiver and sets of the Stearns Company, except the actrustee. There is, I understand, no question counts receivable, and that those were so unbut what, for several months preceding the collectible that the Stearns Company was in. filing of the bankruptcy petition on July 12, solvent, I still do not see why the Trust Com1923, the Stearns Company had been insol- pany was prevented by such knowledge from vent in the bankruptcy sense. The insolven- taking payment from Battey on his obligacy appears, on the evidence before me, to

tions as indorser. The present case in its have been due to the extraordinarily poor

basic facts resembles Newport Bank v. Herkcharacter of the book accounts. If those had imer Bank, 32 S. Ct. 633, 225 U. S. 178, 56 been reasonably good, it would have had L. Ed. 1042, rather than Dean v. Davis, 37 S. property enough to pay its debts.

Ct. 130, 242 U. S. 438, 61 L. Ed. 419. The plaintiff contends that the payment

If Battey had been financially irresponsiof $13,079 to the trust company by Battey ble, and the trust company had known that to was in reality a preferential payment by the be the fact, and that the payment was in Stearns Company; that the purpose in ship- reality being made by the Stearns Company ping him the large amount of shoes just be- through Battey as a screen, there might be fore liquidation was for him to realize on

grounds for supposing that the whole transthem and pay the proceeds to the trust com- action was a cover for a preference. There pany, and thus indirectly to effect a prefer- is, however, no evidence, and no claim by ence; and that this was known to the trust the plaintiff, that Battey was irresponsible. company. This view requires the rejection of On the contrary, the implications of the eviMr. Whittaker's testimony as intentionally dence are that he was a man of some properfalse. While there is no doubt that the court ty and of good standing in the business will look behind the appearance of a trans- world, and in the plaintiff's brief it is said action to its real character, it seems to me that his estate was solvent. Still less does it that the evidence fails to establish the plain- appear that the trust company knew or betiff's contentions. I see no sufficient reason lieved him to be insolvent, and was arranging with him on the basis of that knowledge MORTON, District Judge. This is a suit to protect itself, or was colluding with him to recover $6,000 paid to the defendant by for his protection.

one Whitaker, by check, on November 28, Bill dismissed, with costs.

1921. The bill alleges that the transaction was both a preference and a fraudulent conveyance, but only the latter ground is now insisted on. The facts are as follows:

[1] Burgess, Lang & Co. were a firm of PEABODY et al. v. BURGESS.

stockbrokers, who became bankrupt in (District Court, D. Massachusetts. March 2, March, 1922; the plaintiffs are their trustees. 1926.)

Wm. H. Burgess was one of the partners. No. 2155.

Ethel M. Burgess, the defendant, is his wife.

Burgess, Lang & Co. began to find things dif1. Bankruptcy Om 303(3).

ficult—"were up against it”—as Mr. Burgess Evidence held to show that member of bankrupt partnership agreed to give his wife

testified, as early as June, 1921. On August security for her liability on guaranty of his 1lth of that year Mr. Burgess obtained from and firm debts when guaranty was executed. Mrs. Burgess a written guaranty, guarantee2. Fraudulent conveyances en 64(1)-To re- ing payment of firm loans and his personal

cover under fraudulent conveyance, convey- loans at the Liberty Trust Company to the ance must have been made to defraud all

amount of $25,000. He and she both testicreditors, and received without consideration or with knowledge of fraud.

fied in this proceeding that at that time he To recover under fraudulent conveyance,

promised her security against her liability, conveyance must have been made with intent to mentioning the notes of the Milford Power & defraud all creditors, and must have been re- Light Company, which, according to his tesceived either without consideration or with

timony, were later transferred to her. On knowledge of fraudulent intent.

August 12th the firm wrote to her, agreeing 3. Bankruptcy Om 181-Payment to wife of to furnish security on demand. I have no partner in bankrupt partnership, liable on her

doubt that this letter was in pursuance of the guaranty of husband's and firm debts, held not fraudulent conveyance.

understanding under which the guaranty was Transfer to wife of partner in bankrupt

given and is to be regarded as contemporapartnership of proceeds of sale of notes, when neous with it. she was liable on her guaranty of husband's Burgess, Lang & Co., as a firm, owned and firm debts, held not a fraudulent convey: $16,000 par value of the notes of said Milance, even if notes had not previously been set ford Power & Light Company; Mrs. Lang, aside for her to secure her liability on guaranty as alleged; payment not being made to a wife of one of the partners, owned $7,000; stranger or volunteer.

Burgess owned $6,000. The Milford Compa4. Bankruptcy 303(3).

ny was at that time in a receivership in this Evidence held insufficient to show that mem

court; L. K. Clark, Esq., being the receiver, ber of bankrupt partnership paid large sum to and Judge Anderson the directing judge. As wife to defraud his or partnership creditors. the result of negotiations during the fall of 5. Bankruptcy w 181-Agreement to give wife 1921, all the notes referred to were sold on

of partner in bankrupt partnership security November 28th for par, in cash. The check for her guaranty of husband's and partner.

for the notes which had been owned by Mr. ship debts held supported by consideration.

Burgess was given by Whitaker. It was takAgreement to give wife of partner in bankrupt partnership security for her guaranty of

en in the name of Mrs. Burgess, and was dehusband's and partnership debts held supported posited by her husband to her account on by consideration, as against contention that that date. Mr. Burgess testifies that before subsequent payment to her of proceeds of cor

Labor Day, 1921, he had put this $6,000 of porate notes claimed to have been set aside as security was a fraudulent conveyance.

Milford notes in an envelope marked with his wife's name, in a box to which he had access

in the firm's vault, and that they remained In Equity. Suit by W. Rodman Peabody there until delivered by him to Whitaker. and another, trustees in bankruptcy for Bur

He and she both testify that she was informgess, Lang & Co., bankrupts, against Ethel

ed that this had been done. Of the money M. Burgess. Bill dismissed.

passed to her account on November 28th, she Hollis R. Bailey and B. A. Brickley, both imm tely turned over $ 00 to her husof Boston, Mass., for plaintiff.

band, and within a fortnight $1,000 more to Gay Gleason and Sawyer, Hardy, Stone him. She testifies that she paid $1,000 for & Morrison, all of Boston, Mass., for defend- taxes on the Lexington house, which she ownant.

ed, and used the rest of the money in pay

11 F.(20) 412 ment of household bills for which her hus- tablishing that fact is a close question. But band was liable. By January the money had it is clear that on November 28th, when she all been spent in this way; none of it appears received this money, she was liable under the to have been invested.

guaranty-under which she eventually had In connection with the proof of the notes to pay the full amount. The money was in the Milford Company receivership pro- therefore turned over by Mr. Burgess, not to ceedings, Mr. Burgess swore that he owned a stranger or a volunteer, but to a person to them, and he made a statement to that effect whom the firm was under a heavy, although in a letter in connection with the sale of the as yet a contingent, obligation. Such a notes, after the time when, as he now says, transfer may or may not be a preference, but the notes had been turned over to his wife it lacks nearly all the characteristics of a and were in the box, in the envelope marked fraudulent conveyance. with her name. It is argued by the plaintiff [4] It is said for the trustees that there is that at one time or the other he has sworn no convincing proof that the payment of Nofalsely, and upon the face of the record that vember 28th had any relation to the guaranis true. It is, however, clear enough that ty; that, if the money had been turned over Mrs. Burgess paid little or no attention to to her as security, she would naturally have business affairs. She left those entirely to kept it, instead of spending it as she did; her husband's care. The houses where they and that her conduct with reference to it lived, both at Lexington and at Buzzard's shows that what her husband had in mind Bay, were her property. It seems not unlike- was to give her some money, in order to get ly that, when she was asked to sign such a it out of the reach of his creditors. On the substantial guaranty, there should have been other hand, her action in giving back almost some talk about her protection. It was rea- immediately $3,500 to her husband, who put sonable that she should have it, and the let- $2,500 of it into one of the companies in ter from the firm the next day shows that the which Burgess, Lang & Co. were interested, point was considered. Whether the notes is far from indicating a fraudulent intent to were specially referred to is more doubtful, conceal the $6,000. It rather indicates an exbut that all parties interested understood that pectation on his part that the firm would pull she was to be secured upon her guaranty I through. On his testimony the $6,000 was entertain no doubt.

collateral on the guaranty in substitution for On November 28th the firm was insolvent; the Milford notes, and as a matter of strict but it seems to have been by no means hope- law Mrs. Burgess had no right to use it when lessly so. Active conferences between the she did. She had no accurate understanding partners, and between the firm and various of the situation. He probably felt that, if banks, were taking place during the last part the firm pulled through, the matter would be of December, 1921, and the first part of Jan- all right, and, if it did not, she would have to uary following. An agreement for an exten- pay, as she later did, the whole amount of her sion came, on the testimony of Mr. Burgess, guaranty. Twenty-five thousand dollars of very near to going through. But market con- Mrs. Burgess's money has gone to the crediditions continued unfavorable to the firm's .tors of the bankrupts. On the whole eviinterest, the companies in which it was inter- dence, I am not satisfied that the $6,000 was ested became involved in financial difficulties either paid or received with an intent on the because the firm was unable to support them, part of the parties to the transaction to deand this in turn made the position of the firm fraud the creditors of her husband, or of still more difficult. The petition in bankrupt- Burgess, Lang & Co. cy was filed against it and the partners on [5] The plaintiffs further suggested that the March 18, 1922, and adjudication followed. existence of the guaranty, and Mrs. Burgess's [2, 3] It is essential to recovery under a contingent liability thereon, at the time when fraudulent conveyance that the conveyance she received the money, did not furnish any shall bave been made with an intent to de- consideration for her receiving it, that the fraud all creditors, and shall have been re- payment to her was therefore a voluntary ceived, either without consideration or with payment, and that voluntary payments made knowledge of the fraudulent intent. If the by an insolvent are presumptively fraudulent notes were in fact put aside for Mrs. Burgess and recoverable for the benefit of his crediwithin a few weeks after her guaranty was tors, without any fraudulent. intent on the given, there is no doubt that she is entitled to part of the transferee. The evidence, how. hold both them and the proceeds. Whether ever, clearly shows an understanding that the uncorroborated testimony of the defend- Mrs. Burgess should receive security against ant and her husband shall be accepted as es- her guaranty. The case is not one in whick

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