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Irving Trust Co. v. Trust Co.

February 4, 1935

IRVING TRUST CO.
v.
TRUST CO. OF NEW JERSEY



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

Author: Chase

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

CHASE, Circuit Judge.

W. A. McHorney & Co. borrowed $40,000 of the defendant on May 17, 1929, on its promissory note, indorsed by its president, and payable in three months. When due, the note was renewed for another three months without reduction. On the due date $5,000 was paid and the remainder renewed for three months. A payment of $2,500 was then made, and a new note on three months' time given for the remainder. Other payments were made each three months and renewal notes given until, on September 17, 1930, when a payment of $2,000 was made reducing the principal to $26,000 and another three months' renewal was requested, the bank insisted upon a larger payment. Mr. W. A. McHorney, acting for W. A. McHorney & Co., the maker, and himself as the indorser, represented to the bank that no more could be paid then, but promised that reductions would be made "as things come along." On December 17, 1930, when the note became due, the bank pressed for faster payment, but did accept $2,000 on the principal and a renewal note for the remainder due March 17, 1931. At that time only $1,000, was paid and the remainder renewed for a like period, although the bank was becoming more and more insistent upon larger reductions being made. When this note became due on June 17, 1931, a substantial reduction was demanded, but, upon McHorney's promise to sell some merchandise and make such a payment, a six-day note for the balance then due, $23,000, was accepted. But when it fell due on June 23, 1931, no reduction could be made, and a note for like amount for three days was taken. Upon the payment of $4,000 when that note was due, another was accepted for $19,000 due in three months. During the rest of 1931, the note was renewed twice, and $1,000 was paid at the time of each renewal, which brought the principal down to $17,000, for which a renewal note payable in three months was given on December 28, 1931. A payment on this note under the circumstances to be stated is the preference which has been recovered by the plaintiff.

On February 9, 1932, McHorney went to the defendant bank, where he handed to Meixner, the officer of the bank with whom he was accustomed to transact his business there, as a payment on the note, a check for $16,000 drawn by a man named Ackerman, payable to Elite Rug Company, Inc., the bankrupt, and indorsed by the payee, by W. A. McHorney, as its president. The bank had had no dealings with Elite Rug Company, Inc., and Meixner wanted to know about it. He was then told that it was "the new name of the W. A. McHorney Company," and told to call by telephone the attorney who had charge of the matter of the change of name, as he knew all about it. This was done, and Meixner was assured by the attorney that the name of W. A. McHorney & Co. had been legally changed to Elite Rug Company, Inc. The attorney told Meixner to take the check, but he was unwilling to do so until he had called the bank's attorney and was advised by him to take it. McHorney testified that he then told Meixner "that we were making an adjustment and a reorganization; that we were going to make an assignment, as near as I can remember." He was immediately asked if it was an assignment for the benefit of creditors, and replied: "Not for the benefit of creditors. My idea of an assignment and an assignment for the benefit of creditors are two different things."

The next day, however, the bankrupt did make an assignment for the benefit of its creditors. Fifteen days later an involuntary petition in bankruptcy was filed, and it was adjudicated in due course. The principal issue of fact finally contested was whether the defendant had reasonable cause to believe when the payment of $16,000 was made that it was receiving a preference under section 60b of the Bankruptcy Act (11 USCA ยง 96 (b).

An application for the appointment of a special master was made by the plaintiff and opposed by the defendant, who demanded a trial by jury. The plaintiff then moved for the appointment of an auditor, and an order was made by a District Judge granting the motion to the extent that an auditor was "appointed under and in pursuance of the provisions of General Order 26 of this Court, to define and simplify all the issues herein; to take and report testimony, to audit and state accounts; to make computations; to make findings on conflicting evidence and to make and file a report thereon in the office of the Clerk of this Court with all convenient speed, which report shall not finally determine the issues, but shall, unless excepted to within ten days after the service of notice of filing and rejected by the Court, be admitted at the trial before the jury as prima facie evidence of the evidentiary facts and of the conclusions of fact therein set forth. * * *"

The auditor so appointed performed his duties and filed a report in which he included the evidence taken before him; correctly defined the issues contested; and made findings to the effect that the bankrupt was insolvent when the $16,000 was paid, and that the defendant then had reasonable cause to believe that it was receiving a preference. Exceptions to this report were overruled. When the cause came on for trial before a jury, the plaintiff introduced the report in evidence and rested. Thereupon the defendant presented its evidence, and the issues were explained to the jury in a charge in which the indecisive effect of the report was clearly and correctly stated.

On this appeal what amounts to two questions are presented: First, whether the auditor should have been appointed, though the power to make the appointment is not denied, and his report introduced in evidence at the jury trial; and, second, whether the evidence was sufficient to support the verdict.

That a District Court has the power to make such an order as the one appointing this auditor is, indeed, beyond question. Matter of Walter Peterson, 253 U.S. 300, 40 S. Ct. 543, 64 L. Ed. 919; Primrose v. Fenno (C.C.) 113 F. 375. Of course, care should be exercised to make an appointment only when it will serve to clarify the issues and aid the jury in determining the essential facts. An auditor is appointed as an aid to a trial by jury and never properly appointed to curtail the scope of the jury's inquiry into the facts. Often in a case of this nature, which involves the question of insolvency at a time when the alleged preference was received, there are many accounts involved and many complicated computations must be made. A jury is not well adapted to make them, and this is no doubt a reason for providing in rule 26 of the District Court for the Southern District of New York for the appointment of an auditor in any bankruptcy proceeding where the issue of insolvency is to be tried. When this auditor was appointed, that issue was to be tried. While the fact that during the hearing before the auditor insolvency was conceded served to simplify the issues, it cannot be said that the appointment was an abuse of discretion at the time it was made.

Because the report not only contained the finding that the bankrupt was insolvent when the payment was made on the note, an inevitable finding, since insolvency was conceded during the hearing before him, but also the finding that the defendant had reasonable cause to believe that it was being preferred, it is urged that its admission in evidence at the trial in the District Court as prima facie proof of that fact deprived the defendant of its right to a trial by jury on a vital issue in the case. The order of reference authorized the auditor "to make findings on conflicting evidence," and that of course meant to make findings upon the matters in controversy which were material. This finding was of that nature. It established only a rebuttable presumption which the defendant was free to contest without restriction before the jury. It left the defendant in no worse case than any defendant is in when a plaintiff proves a prima facie case on the opening.

It may be that some juries would, despite proper instructions, give undue weight to a report because it was made by an officer of the court. While that is a possibility, it applies equally to any part of an auditor's report and to every such report and is not real enough to be controlling.

The real question is whether a mere rule of evidence, which after all leaves the jury free to decide the issues upon all of the evidence in the case, unlawfully curtails the right to a trial by jury. That it does not is shown by In re Peterson, supra; Meeker v. Lehigh Valley R. Co., 236 U.S. 412, 35 S. Ct. 328, 59 L. Ed. 644; Oklahoma Gas & Electric Co. v. Bates Expanded Steel Truss Co., 34 F.2d 547 (D.C.); Holmes v. Hunt, 122 Mass. 505, 23 Am. Rep. 381; Locke et al. v. Bennett, 61 Mass. (7 Cush.) 445.

The exceptions to the report raise the same question of the sufficiency of the evidence as those relating to the verdict. There was no error if there was any substantial evidence to show that the defendant had ...


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