KAMBERG v. SPRINGFIELD NATIONAL BANK, Mass., Judgment, Law, casemine.com

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Attorney(S)

I. Fein, for the defendant. B.D. Novak A. Kamberg, for the plaintiff.

Judges

LUMMUS, J.

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Smart Summary

Factual and Procedural Background

This case involves an action brought by Abraham Kamberg, trustee in bankruptcy of the Fair Bag Company, to recover an alleged fraudulent preference of $800. Prior to October 21, 1933, the corporation and one Godfrey engaged in exchanging worthless checks ("kiting"). Godfrey issued a worthless check to the corporation, which the corporation deposited in the defendant Springfield National Bank. The bank credited the corporation's account and allowed it to draw checks against the amount, which were paid. The check was subsequently returned unpaid to the bank, which demanded reimbursement from the corporation.

The corporation, insolvent at the time, had no money to reimburse the bank but gave it a note for $800 secured by an assignment of accounts receivable. The bank collected the full amount of the note between October 21 and December 20, 1933. An involuntary bankruptcy petition was filed against the corporation on December 9, 1933, and it was adjudicated bankrupt on February 5, 1934.

In the Superior Court, the action was referred to an auditor whose findings were final. Upon the auditor’s report, the court entered judgment for the plaintiff in the amount of $843.47. The defendant bank appealed, and the case was submitted on briefs to the Supreme Judicial Court of Massachusetts.

Legal Issues Presented

Whether the transfer of accounts receivable as security for the note given to the defendant bank constituted a voidable preference under § 60a of the Bankruptcy Act.
Whether the defendant bank had reasonable cause to believe that enforcement of the transfer would effect a preference.
Whether property obtained by fraud by a bankrupt before bankruptcy, but not traceable among estate assets, may be reclaimed by the creditor or treated as a general creditor’s claim.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jump v. Bernier, 221 Mass. 241, 247	Establishes insolvency of the corporation at relevant times.	Confirmed the corporation was insolvent when the note was given and thereafter.
Putnam v. United States Trust Co., 223 Mass. 199, 205	Reasonable cause to believe a transfer would effect a preference.	Supported finding that the bank had reasonable cause to believe enforcement would be preferential.
Wasserman v. Hollidge, 267 Mass. 460, 470	Reasonable cause and preference principles.	Reinforced the concept of voidable preferences under bankruptcy law.
Brown v. Palmer Clay Products Co., 290 Mass. 108	Related to insolvency and preference rules.	Referenced in context of insolvency and preference analysis.
Royal Paper Box Co. v. Munro Church Co., 284 Mass. 446, 449	Proper practice of appealing from auditor’s report.	Validated the appeal procedure used by the defendant.
Gagnon v. Ainsworth, 283 Mass. 488	Appeal procedure and auditor’s report finality.	Supported the procedural posture of the case.
Howland v. Stowe, 290 Mass. 142, 146	Requests for rulings on appeal from auditor’s report are immaterial.	Court declined to consider requests for rulings as findings were final.
Rogers v. American Halibut Co., 216 Mass. 227	Intent to prefer not essential for preference under bankruptcy law.	Clarified that preference can be voided without intent to prefer.
Wilson v. Mitchell-Woodbury Co., 214 Mass. 514, 517-518	Definition and scope of preference under bankruptcy law.	Supported the legal framework for preference analysis.
Coder v. Arts, 213 U.S. 223	Distinction between preference and fraudulent transfer provisions.	Clarified that § 67e (fraudulent transfers) was not involved here.
Van Iderstine v. National Discount Co., 227 U.S. 575	Bankruptcy preference principles.	Referenced for preference doctrine.
Dean v. Davis, 242 U.S. 438	Preference and insolvency principles.	Supported interpretation of preference under bankruptcy law.
Adams v. Champion, 294 U.S. 231, 235	Preference and bankruptcy proceedings.	Reinforced the legal standard for voidable preferences.
Baker v. Chisholm, 268 Mass. 1, 3-5	Essence of preference as unequal distribution of assets.	Confirmed that preference involves diminution of assets resulting in unequal creditor treatment.
Comparone v. M.J. Caplan Co. Inc., 270 Mass. 74, 79	Preference and insolvency.	Supported the characterization of preference.
Citizens' National Bank of Gastonia v. Lineberger, 45 Fed. Rep. 2d 522, 526	Fair exchange of assets not constituting preference.	Distinguished loans on security from preferences.
Tiffany v. Boatman's Institution, 18 Wall. 375	Fair exchange of assets not a preference.	Clarified that a secured loan to an insolvent is not necessarily a preference.
O'Connell v. Worcester, 225 Mass. 159, 162	Preference principles.	Referenced for preference analysis.
Cunningham v. Commissioner of Banks, 249 Mass. 401, 417	Preference doctrine.	Applied in preference context.
Hanford v. Codman, 266 Mass. 93, 96	Preference and insolvency.	Used to illustrate preference rules.
Bussing v. Rice, 2 Cush. 48	Fraudulently obtained property not part of bankrupt estate.	Supported the principle that fraudulently obtained assets can be reclaimed.
Watson v. Silsby, 166 Mass. 57	Fraudulent property recovery.	Reinforced the trustee’s right to reclaim fraudulently obtained property.
Donaldson v. Farwell, 93 U.S. 631	Fraudulent property in bankruptcy.	Supported the trustee’s recovery rights.
Montgomery v. Bucyrus Machine Works, 92 U.S. 257	No preference if fraudulent property is restored before bankruptcy.	Clarified that restoration negates preference.
Schall v. Camors, 251 U.S. 239, 251	Claim of fraud victim ranks as general creditor if property untraceable.	Applied to hold that untraceable fraudulently obtained property does not elevate creditor status.
Lewis v. Roberts, 267 U.S. 467	Similar principle as Schall v. Camors.	Supported the general creditor status when property is untraceable.
Clarke v. Rogers, 228 U.S. 534	Voidable preference when insolvent satisfies claim with other assets.	Applied to determine that transfer securing the note was a voidable preference.
National City Bank of New York v. Hotchkiss, 231 U.S. 50	Voidable preference doctrine.	Supported the court’s conclusion on preference.
Cunningham v. Brown, 265 U.S. 1, 11-12	Preference and insolvency.	Referenced in preference analysis.
Bush v. Moore, 133 Mass. 198	Preference principles.	Used as precedent for preference determination.
Yesner v. Commissioner of Banks, 252 Mass. 358	Preference and insolvency.	Applied in preference context.
Downing v. Cunningham, 256 Mass. 285	Preference doctrine.	Referenced for preference rules.
Worcester Bank Trust Co. v. Nordblom, 285 Mass. 22, 25-26	Preference and insolvency.	Applied in preference analysis.
Atherton v. Green, 179 Fed. Rep. 806	Preference doctrine.	Referenced in the court’s reasoning.
Burgoyne v. McKillip, 182 Fed. Rep. 452, 454	Preference and insolvency principles.	Supported preference analysis.
In re Dorr, 196 Fed. Rep. 292, 298	Preference doctrine.	Referenced in court’s reasoning.
Wuerpel v. Commercial Germania Trust Savings Bank, 238 Fed. Rep. 269, 272-273	Preference principles.	Applied in preference determination.
Watchmaker v. Barnes, 259 Fed. Rep. 783, 788	Preference and insolvency.	Referenced for preference analysis.
Ross v. H. Michaelyan, Inc., 57 Fed. Rep. 2d 674	Preference doctrine.	Used as precedent for preference ruling.
Walser v. International Union Bank, 21 Fed. Rep. 2d 294	Similar case involving voidable preference.	The court found this case analogous to the present facts.

Court's Reasoning and Analysis

The court analyzed the transaction under § 60a of the Bankruptcy Act, which defines a preference as a transfer by an insolvent within four months before filing bankruptcy that enables certain creditors to receive a greater percentage of their debt than others of the same class. The court emphasized that intent to prefer is not necessary; reasonable cause to believe a preference results suffices.

The corporation was insolvent when it gave the bank a note secured by accounts receivable to satisfy the bank's demand after the worthless check was returned unpaid. The bank had reasonable cause to believe the enforcement of the transfer would effect a preference.

Because the money originally obtained by fraud was not traceable among the corporation’s assets at the time of the note, the bank held no superior claim beyond that of a general creditor. The note and assignment of accounts receivable constituted a voidable preference, as the transfer diminished the estate’s assets and unfairly favored the bank over other creditors.

The court found that the judgment for the plaintiff trustee was correct based on the facts and the applicable bankruptcy law principles.

Holding and Implications

The court affirmed the order for judgment in favor of the plaintiff trustee for the amount of $800 plus interest.

This decision directly affects the parties by confirming that the defendant bank’s security interest constituted a voidable preference under bankruptcy law, allowing the trustee to recover the amount. The opinion does not establish new precedent but applies established principles concerning preferences, insolvency, and fraudulent transfers in bankruptcy proceedings.

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ABRAHAM KAMBERG, trustee in bankruptcy, vs. SPRINGFIELD NATIONAL BANK.

Bankruptcy, Preference, Reclamation. Fraud. Practice, Civil, Appeal, Requests, rulings and instructions.

An appeal lies to this court from an order for judgment made in the Superior Court upon the report of an auditor whose findings were to be final; and upon such an appeal requests for rulings of law are immaterial, the only question being whether the order for judgment was right on the facts found. Though property obtained by fraud by a bankrupt before bankruptcy is not properly part of his estate in bankruptcy and may be reclaimed from the trustee if it can be traced among the assets of the estate, if it cannot be so traced the creditor has only the claim of a general creditor. There was a voidable preference under § 60 of the national bankruptcy act where one later adjudicated a bankrupt obtained money by fraud, but thereupon paid it to others so that it could not be traced among his assets and the creditor had no right to reclaim it in the subsequent bankruptcy proceedings; and the creditor, at a time when the debtor was insolvent and within four months before the filing of the petition in bankruptcy, received from him a note for the amount of such money secured by an assignment of accounts receivable of the debtor, upon which the creditor subsequently collected the note in full, he at the time of receiving the assignment having reasonable cause to believe that its enforcement would effect a preference.

LUMMUS, J.

This is an action by the trustee in bankruptcy of a corporation named the Fair Bag Company to recover an alleged fraudulent preference amounting to $800. A few days before October 21, 1933, the corporation and one Godfrey engaged in the exchange or "kiting" of worthless checks. The check which Godfrey drew on a bank in Connecticut and gave to the corporation was deposited by the latter in the defendant bank, which credited the amount to the corporation, permitted the corporation to draw against it, and paid the checks so drawn. Godfrey's check was returned unpaid to the defendant bank.

The defendant bank at once demanded reimbursement. The corporation had no money, but gave the bank its note for $800, dated October 21, 1933, secured by an assignment of accounts receivable, upon which, between that date and December 20, 1933, the bank collected $800 in satisfaction of the note. When the note was given and at all later times the corporation was insolvent ( Jump v. Bernier, 221 Mass. 241, 247), and the bank had reasonable cause to believe that the corporation was insolvent and that the transfer of the accounts receivable, if enforced, would effect a preference. Putnam v. United States Trust Co. 223 Mass. 199, 205. Wasserman v. Hollidge, 267 Mass. 460, 470, and cases cited. Brown v. Palmer Clay Products Co. 290 Mass. 108. An involuntary petition in bankruptcy against the corporation was filed on December 9, 1933, and it was adjudicated a bankrupt on February 5, 1934.

The judge ordered judgment for the plaintiff for $800 and interest, and the defendant bank appealed. This was proper practice. Royal Paper Box Co. v. Munro Church Co. 284 Mass. 446, 449. Gagnon v. Ainsworth, 283 Mass. 488. Since the case was presented on the report of an auditor whose findings of fact were to be final, the requests for rulings are unimportant, and need not be discussed. Howland v. Stowe, 290 Mass. 142, 146. The only question is, whether the order for judgment was right upon the facts found. That depends upon whether the transaction was a preference.

Under § 60a of the bankruptcy act (U.S.C. Title 11, § 96a) "a person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition, or after the filing of the petition and before the adjudication, . . . made a transfer of any of his property, and the effect of the enforcement of such . . . transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class." If a preference is given, it may be avoided by the trustee and the property or its value recovered, if "the person receiving it or to be benefited thereby, or his agent acting therein, shall then have reasonable cause to believe that the enforcement of such . . . transfer would effect a preference." An intent to prefer is not essential to a preference. Rogers v. American Halibut Co. 216 Mass. 227. See Wilson v. Mitchell-Woodbury Co. 214 Mass. 514, 517, 518. This case does not involve § 67e of the bankruptcy act (U.S.C. Title 11, § 107 [e]), dealing with fraudulent transfers. Coder v. Arts, 213 U.S. 223. Van Iderstine v. National Discount Co. 227 U.S. 575. Dean v. Davis, 242 U.S. 438. Adams v. Champion, 294 U.S. 231, 235. Baker v. Chisholm, 268 Mass. 1, 3, 4.

The essence of a preference is a diminution of assets which, unless corrected, would result in unequal distribution. Baker v. Chisholm, 268 Mass. 1, 4, 5. Comparone v. M.J. Caplan Co. Inc. 270 Mass. 74, 79. Citizens' National Bank of Gastonia v. Lineberger, 45 Fed. Rep. 2d 522, 526. Consequently a fair exchange of assets, like a loan to an insolvent upon security, is not of itself a preference. Tiffany v. Boatman's Institution, 18 Wall. 375. O'Connell v. Worcester, 225 Mass. 159, 162. Cunningham v. Commissioner of Banks, 249 Mass. 401, 417. Hanford v. Codman, 266 Mass. 93, 96. Beacon Trust Co. v. Dolan, 27 Fed. Rep. 2d 247. In re Metropolitan Dairy Co. 224 Fed. Rep. 444, 445.

If an insolvent has obtained money or property by fraud or other tort, that money or property is not properly part of the assets of his estate, and may be reclaimed from the trustee in bankruptcy. Bussing v. Rice, 2 Cush. 48. Watson v. Silsby, 166 Mass. 57. Donaldson v. Farwell, 93 U.S. 631. In re New York Commercial Co. 228 Fed. Rep. 120. In re Horigan Supply Co. 2 Fed. Rep. 2d 791. Manly v. Ohio Shoe Co. 25 Fed. Rep. 2d 384, 59 Am. L.R. 413. California Conserving Co. v. D'Avanzo, 62 Fed. Rep. 2d 528. Sternberg v. American Snuff Co. 69 Fed. Rep. 2d 307. Likewise, if the insolvent restores it before bankruptcy occurs, there is no preference, for there is no diminution of assets. Montgomery v. Bucyrus Machine Works, 92 U.S. 257. Hough v. Atchison, Topeka Santa Fe Railway, 34 Fed. Rep. 2d 238, 240, 241. Fisher v. Shreve, Crump Low Co. 7 Fed. Rep. 2d 159.

But that principle applies only so long as the money or property can be traced and found, either in its original or in an altered form, in some particular assets. When that can no longer be done, the claim of the person who has been deprived of money or property by fraud or other tort ( Schall v. Camors, 251 U.S. 239, 251; Lewis v. Roberts, 267 U.S. 467), ranks no higher than the claims of ordinary creditors. If, after the identity of the money or property has been lost, an insolvent satisfies or secures the claim by a transfer of other assets to one who takes with reasonable cause to believe that the transfer will effect an unequal distribution, the transfer is a voidable preference. Clarke v. Rogers, 228 U.S. 534. National City Bank of New York v. Hotchkiss, 231 U.S. 50. Cunningham v. Brown, 265 U.S. 1, 11, 12. Bush v. Moore, 133 Mass. 198. Yesner v. Commissioner of Banks, 252 Mass. 358. Downing v. Cunningham, 256 Mass. 285. Worcester Bank Trust Co. v. Nordblom, 285 Mass. 22, 25, 26. Atherton v. Green, 179 Fed. Rep. 806. Burgoyne v. McKillip, 182 Fed. Rep. 452, 454. In re Dorr, 196 Fed. Rep. 292, 298. Wuerpel v. Commercial Germania Trust Savings Bank, 238 Fed. Rep. 269, 272, 273. Watchmaker v. Barnes, 259 Fed. Rep. 783, 788. Ross v. H. Michaelyan, Inc. 57 Fed. Rep. 2d 674.

In the present case there is no suggestion that the money wrongfully obtained from the defendant bank existed among the assets of the corporation on October 21, 1933, or at any later time. On the contrary, it had been paid out upon checks drawn by the corporation, apparently in favor of its creditors. The defendant accepted a note for its claim. The facts gave the defendant bank no status superior to that of other creditors. The judge was right in deciding that there was a voidable preference, and in ordering judgment for the plaintiff. The case resembles Walser v. International Union Bank, 21 Fed. Rep. 2d 294.

Order for judgment affirmed.

KAMBERG v. SPRINGFIELD NATIONAL BANK