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Irving Trust Co. v. Chase Nat. Bank of City of New York

August 17, 1934


Appeal from the District Court of the United States for the Southern District of New York.

Author: Hand

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This is a suit by the trustee in bankruptcy of Robbins & Prokesch, Inc., against the Chase Bank and Bank of Manhattan Trust Company to recover payments made by Robbins & Prokesch, Inc., in contravention of section 15 of the Stock Corporation Law of the state of New York (Consol. Laws, c. 59).

It is necessary for the claimant to establish that:

(1) The insolvency of Robbins & Prokesch, Inc., existed or was imminent at the times when it made the payments.

(2) The payments resulted in a preference.

(3) The banks, at the time when the payments were received, had notice or reasonable cause to believe that they would effect a preference.

(4) An intent to give a preference existed on the part of the bankrupt.

Robbins & Prokesch, Inc., a New York corporation, was a manufacturer of ladies' handbags. Its principals had been in business for many years and were well regarded in the trade. It suffered an operating loss of $100,418.42 in 1930, and its net worth declined from $115,618.88 on December 31, 1930, to $9,070.20 on December 31, 1931. This loss was due both to the depression and the interruption of business and disturbance of the corporate organization in moving the factory from New York to Sussex, N.J.

The principal stockholders and officers were Bernard and Benjamin Robbins. During the second half of 1931, Benjamin wished to relinquish his interest in the business. It was recognized that it would be difficult for Bernard to continue the business, as he wished to do, unless creditors were willing to give extensions of the corporate obligations. Accordingly Bernard Robbins arranged with the merchandise creditors to pay 50 per cent. on the claims within 60 days, 25 per cent. within the next 60 days, and the remaining 25 per cent. within a year. He had informed his banks of the proposal to the merchandise creditors, and, while he did not ask them to enter into the same arrangement, he suggested that the line of credit which he had with them should be extended for 120 days and told his merchandise creditors that the banks would "play along." Though the banks gave him some encouragement at first, they told him that they expected payment of all their notes as they matured and in practice only varied a little from this exacting requirement by renewing to a limited extent.

Robbins & Prokesch, Inc., owed the Chase Bank $17,500, for which it had given notes, two for $2,500 and $3,500, respectively, falling due in December, one for $4,000 on January 8, 1932, one for $4,000 on January 15, and one for $3,500 on January 25 of that year. It owed Bank of Manhattan $15,000 on three notes -- $5,000 due December 21, $5,000 due December 24, and $5,000 due December 31, 1931. It also owed the Sussex National Bank of New Jersey $10,000 on two notes of $5,000 each due in February, 1932. By January 25, the Chase Bank had received all but $2,750 of the $17,500 which was due it in the beginning. The Manhattan Bank received all but $5,000 of the $15,000 due in December. The balance was paid $1,750 in January, $1,500 in February, $1,250 in March, and the $500 remaining on April 5, 1932.

All the merchandise creditors signed the extension agreement and received 50 per cent. of their claims. Robbins did not wait until the 60 days, but began to pay about December 27, and completed the 50 per cent. installment in February. He was unable to pay the next 25 per cent. installment, though, before it came due, the banks were paid in full. Bernard Robbins continued the business from December 19, 1931, to May 31, 1932, and incurred debts of $32,600 for new merchandise purchased largely from his old creditors. During that period the company paid about $27,000 of the $54,000 debts which were due the old merchandise creditors and about $3,000 out of some $16,000 owing on family claims which, it is said, were to be reduced on the same basis as the original merchandise creditors. It paid all but about $6,000 of the $32,600 of indebtedness to the new merchandise creditors and paid the banks in full. When some of the old merchandise creditors failed to receive the second installment on their claims and learned that Robbins & Prokesch, Inc., had assigned its accounts on February 18, 1932, to raise money and that the banks had fared better than themselves, they filed a petition in bankruptcy, and after an adjudication the trustee brought this suit.

The case is undoubtedly a close one, and its decision depends on the resolution of questions of fact. The court below found that there was no intent on the part of Robbins & Prokesch, Inc., to give a preference to the banks.If this was wrong, it must be because Bernard Robbins, with his brother Benjamin, had guaranteed the notes of Robbins & Prokesch, Inc., held by the banks, and that one of Bernard's objects in having his corporation make the payments was to get rid of the personal liability of himself and his brother. While the conclusion of the trial judge that the discharge of this liability was of no moment to Bernard seems unlikely, we cannot say that he was wrong in finding that the dominating and only important thing in Bernard's mind was to keep the business afloat for himself and his son by paying off creditors that would not agree to extend the notes which they held. If the intent was to prefer, it seems difficult to suppose that Bernard would agree to purchase Benjamin's stock, have the corporation actively engage in manufacturing for some months before bankruptcy, and pay part of the notes as they matured, rather than the whole, when it was entirely possible to have completely discharged them earlier than he did. Moreover, when he was told by the Chase Bank that it would not extend payment of its notes as the merchandise creditors had their claims, he would not have got angry and said that its insistence on payment of the notes as they accrued had "dumped his whole plan of liquidation and literally made a liar of him to his creditors." Likewise the purchase of a large amount of stock by the corporation and the payment of nearly all the indebtedness thus incurred is further evidence that Bernard had faith in his ability to carry it through its embarrassment. It must be remembered that the statement of December, 1931, showed a net balance of assets, that he believed the accounts receivable good, the inventory valued too low, and the plant worth more than it was carried at.To suppose that he went to the labor of buying out his brother, purchasing new goods, personally going on the ...

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