The opinion of the court was delivered by: COOPER
This petition of the Federal Deposit Insurance Corporation (hereinafter F.D.I.C.) seeks review of an order dated November 6, 1964 of the Referee in Bankruptcy, R. Lewis Townsend, setting aside certain preferential transfers made to it by the bankrupt Anjopa Paper & Board Manufacturing Company, Inc. (hereinafter Anjopa).
A review of a rather extensive and somewhat concentrated record before us reveals that Anjopa was engaged in the manufacture of paper products and owned a plant in Ellenville, New York. From June 1951, when the company started operations with its president, Joseph Di Candia, through November 1956 Anjopa obtained substantial amounts of capital from the Home National Bank of Ellenville (hereinafter the Bank). On November 30, 1956, national bank examiners discovered evidence of gross irregularities in the Bank's affairs and a substantial shortage. That same day, the president of the Bank, William R. Rose, confessed to agents of the Federal Bureau of Investigation that the Anjopa loans had not been authorized by the Directors of the Bank, and that they were secretly obtained by Di Candia through the falsification of Bank records by Rose whereby Anjopa's account was overstated, thus permitting the company to draw against a non-existent balance. A subsequent audit revealed that there was a shortage in excess of $1,000,000 almost all of it representing advances to Anjopa. The Bank was closed on December 3, 1956. The next day F.D.I.C. was appointed Receiver of the Bank by order of the Comptroller of the Currency acting under the authority of Title 12 of the United States Code, Section 1821(c).
F.D.I.C., as receiver for the creditor bank, attempted to recoup Anjopa's indebtedness. It held conferences with Di Candia and his accountant to determine, among other things, Anjopa's business prospects, its then financial condition, and the alternative methods by which F.D.I.C. could protect the Bank's advances. On December 20, 1956, real and chattel mortgages with an underlying note for $800,000 were executed by Di Candia and delivered to F.D.I.C.; recording thereof took place the next day. The plant continued to operate under Di Candia's direction until it was closed in December 1957.
In March 1957 F.D.I.C. obtained an appraisal of the plant. Trustee's Ex. 12. This indicated that the plant was worth some $300,000 as a going concern, a figure much less than expected. By letter dated March 25, 1957 F.D.I.C. called a meeting of Anjopa's creditors for April 2, 1957 when it advised them for the first time of the existence of the December 20, 1956 mortgages. The letter also stated (Trustee's Ex. 23):
On the basis of the financial statements given to the Receiver by 'Anjopa', the appraisal of its assets that has been made by the Receiver, and a resume of its operational statements since the closing of the bank, it is evident that 'Anjopa' cannot be expected to liquidate its heavy indebtedness within a reasonable time.
At the meeting and in face of creditor opposition, F.D.I.C. confirmed its intention to keep its mortgages. The creditors present took the position that the mortgages might be preferential transfers under Section 60 of the Bankruptcy Act. F.D.I.C., on the other hand, justified its lien on the plant and machinery pointing out that Bank funds had been used in Anjopa's capital expansion, and that they had cancelled checks to prove it.
Although the period in which creditors could have attacked the mortgages under Section 60 had elapsed on April 20th, after further talks with the creditors, F.D.I.C. in July, 1957 entered into a compromise agreement with Anjopa. In consideration of waiver by the creditors of any rights to challenge the validity of the mortgages it held, F.D.I.C. agreed to compromise its claim of over $1,000,000 in exchange for $100,000 in third-party notes (representing some of Anjopa's accounts receivable) and $200,000 in four semi-annual payments of $50,000 beginning one year thereafter. Pursuant to 12 U.S.C. § 192 the necessary judicial approval of such an agreement by a court having jurisdiction in the local community, viz., the New York Supreme Court, was obtained.
On December 10, 1957 Di Candia was sentenced by a Judge of this Court to three years for misappropriation of national bank funds. The plant closed three days thereafter.
On March 21, 1958 an involuntary petition in bankruptcy was filed against Anjopa; it was adjudicated a bankrupt on April 8, 1958, all further proceedings being referred to the Honorable Normington Schofield, Referee in Bankruptcy. Anjopa defaulted under the above compromise agreement by failing to meet the first payment of $50,000 due in July 1958. Accordingly, F.D.I.C.'s mortgages were never cancelled, nor was the debt (less collections of $95,201 on the notes) compromised.
By order dated June 19, 1958 the Referee granted F.D.I.C. permission to foreclose its mortgages. At the foreclosure sale on March 2, 1959 and after some bidding, F.D.I.C. purchased the plant and real property for $80,000 which sum was applied as a reduction of the total indebtedness of the bankrupt to F.D.I.C. After fees, allowances, and other expenses the net reduction amounted to $38,533.21. The property was resold to American Paper and Board Manufacturing Company, Inc. (hereinafter American Paper) on August 19, 1959. F.D.I.C. received a down payment of $25,000 and a purchase money mortgage of $200,000, installments to be paid over a period of eight years at 4% interest. In addition, American Paper assumed a prior mortgage of $13,700. After making some payments toward the $200,000 mortgage, American Paper defaulted.
A second foreclosure sale was held in November 1961, and F.D.I.C. again bid on the property. On May 15, 1962 it entered into an agreement to sell the property to Channel Master Corporation for $68,200.
The instant proceedings were initiated by the trustee in bankruptcy by notice of motion dated March 6, 1959. In substance, the trustee's petition alleged that Anjopa's transfers to F.D.I.C. of property (the December 20 mortgages) and cash (the third-party notes upon which $95,201 was realized) were in violation of Section 15 of the New York Stock Corporation Law, McKinney's Consol.Laws, c. 59, because they were made: (1) at a time when the bankrupt was insolvent, or its insolvency was imminent; (2) with intent to prefer F.D.I.C. over other creditors, and (3) with F.D.I.C.'s knowledge (or reasonable cause to believe) of the insolvency and intent to prefer. The petition sought an order disallowing the bankruptcy claim filed by F.D.I.C. as a general creditor and an affirmative judgment setting aside the transfers made by Anjopa, and requiring F.D.I.C. to surrender them or their proceeds to the trustee.
Numerous hearings thereon were held before Referee Schofield. By memorandum decision dated April 14, 1962 the Referee found that F.D.I.C. had violated Section 15, and the trustee's motion was granted. However, the Referee did not set aside the transfers, since F.D.I.C. had already sold the mortgaged property to American Paper and collected on the notes. Instead, he held that the order to be entered pursuant to his decision should (page 8):
"provide for the payment to the Trustee of the purchase price that F.D.I.C. received in the sum of $238,700.00 less any expenditures or credits to which it may be entitled * * * to be agreed upon by the parties or determined by a future hearing * * * plus the payment by F.D.I.C. to the Trustee * * * which it received for [the notes]."
The parties not being able to agree on the credits, a hearing was held on June 21, 1962. On that day F.D.I.C. also sought to re-open the hearings with regard to the trustee's petition, especially with respect to the Referee's ruling that F.D.I.C. pay the trustee $238,700 (less expenses), an amount much in excess of what was actually received for the property from American Paper. Referee Schofield reserved decision. Further, F.D.I.C. sought an order approving the then pending sale of the property to Channel Master Corporation; this motion was denied in a decision rendered the next day, although no order was entered thereon. Referee Schofield died on June 1, 1963.
Referee R. Lewis Townsend was appointed to succeed Referee Schofield by order dated July 1, 1963. As of that date, no findings of fact or conclusions of law had been entered upon the April 14, 1962 memorandum decision, nor had any decision been rendered with respect of the motion for the credits to be allowed, and the motion to re-open.
By stipulation filed January 6, 1964, consented to by the United States Attorney, the trustee and F.D.I.C. agreed that:
(1) All motions, hearings, proceedings, and pleadings had herein and the entire record thereof, including the testimony taken and evidence introduced in connection therewith, had before Referee Schofield shall be deemed as though taken, submitted to, and heard by Hon. R. Lewis Townsend * * * except as to * * * [the motion for approval of the sale to Channel Master].
(3) Referee Townsend * * * shall have in all respects the power and duty to determine all motions and issues of fact and law in the within proceeding * * * as though taken, submitted to and heard by said Hon. R. Lewis Townsend, without being bound by * * * [Referee Schofield's] decision dated April 14, 1962.
Referee Townsend made his determination on March 4, 1964 wherein he: (1) adopted the April 14, 1962 decision of Referee Schofield; (2) denied the motion to re-open the hearing, and (3) allowed F.D.I.C. certain credits. Proposed findings of fact and conclusions of law were submitted by both the trustee and F.D.I.C. in June 1964, and by decision dated September 15, 1964 the trustee's submission was adopted in toto. An order thereon was filed November 6, 1964; it is the basis of this appeal.
The claim of F.D.I.C. heretofore filed against the bankrupt estate, be and it is hereby disallowed unless claimant F.D.I.C., within thirty days from the date hereof, (a) assign to the Trustee in Bankruptcy the uncollected notes receivable assigned to it by the Bankrupt in the face amount of $7,050.60 which said F.D.I.C. is hereby ordered to do, and (b) pays to the Trustee * * * the sum of $288,702.69, with interest on $193,503.35 from December 20, 1956 and on $95,199.34 from July 31, 1957, at the rate of 6% per annum * * *.
Unless F.D.I.C. complied with the above provision, it was further ordered that the trustee would have affirmative judgment against F.D.I.C. for the amounts and interest stated.
By petition dated November 12, 1964 F.D.I.C. seeks review of this order. It alleges numerous errors of fact and law. As required by General Order in Bankruptcy No. 47, 11 U.S.C.A. following section 53, we accept the Referee's findings of fact unless clearly erroneous. The test is similar to that found in Rule 52(a), F.R.Civ.P. In Re Tabibian, 289 F.2d 793 (2 Cir. 1961). "Both the resolution of conflicting testimony and the drawing of factual inferences from circumstantial evidence are protected by the 'unless clearly erroneous rule.'" In Re Hygrade Envelope Co., 366 F.2d 584, 588 (2d Cir. 1966). Where credibility is not involved and the facts are undisputed it has been said that the Court "may more freely draw differing inferences" than the Referee. McChesney v. Sims, 267 F.2d 215, 217 (2d Cir. 1959). On review, the burden of proving error is on petitioner. In re Love B. Woods & Co., 222 F. Supp. 161 (S.D.N.Y.1961).
F.D.I.C. questions the usual application of the not clearly erroneous rule in this case. In answer to the trustee's statement (Memorandum of Law, pp. 1, 13) that two Referees chose not to credit the testimony of F.D.I.C. officials F.D.I.C., for the first time, argues that since "one of them made no findings, and the other did not hear the witnesses, this Court is free to decide the issue [whether there were preferential transfers] itself from the record."
Reply Memorandum, p. 3. We cannot agree for two reasons.
One, the argument is without merit in view of the stipulation signed by F.D.I.C. granting Referee Townsend full "power and duty to determine * * * issues of fact * * * as though * * * heard by * * *" him. The choice was the parties' - the stipulation obviated the necessity of a trial de novo, and we are presented with no reason why its clear language (and the consequences thereof) should be avoided, nor any reason why the facts could not be reasonably found by Referee Townsend, who though not bound by Referee Schofield's decision which resolved the testimonial conflicts, had the benefit thereof.
Second, independent of the stipulation we reach the same conclusion. The clearly erroneous rule is mandated by General Order No. 47 even though the Referee was not in a particularly better position than we to judge matters of credibility. Cf. Summers v. Watkins Motor Lines, 323 F.2d 120 (4th Cir. 1963); United States v. Aluminum Co. of America, 148 F.2d 416, 433 (2d Cir. 1945). As a matter of proper judicial administration, it should not be the province of the reviewing court to "second guess" the Referee. The weight of authority favors the view that in applying the clearly erroneous test, findings of fact not based on the trier's direct observation of witnesses, as here, should be given the same weight (not just "slight" or a little less) as those which are based on the trier's observation of witnesses, otherwise thought to merit the greatest weight. See Lundgren v. Freeman, 307 F.2d 104, 113-115 (9th Cir.1962); 2B Barron & Holtzoff, Federal Practice § 1132 (Wright ed. 1961); Wright, the Doubtful Omniscience of Appellate Courts, 41 Minn.L.Rev. 751, 764-71 (1957); Note, 49 Virg.L.Rev. 506 (1963).
SECTION 15 OF THE NEW YORK STOCK CORPORATION LAW
The trustee in seeking to recover for the estate the mortgages given in 1956 and the account receivable notes given in 1957, relied principally upon this section.
It was enacted to prevent unjust discrimination of one creditor of an insolvent corporation over another by securing "equality in the distribution of the assets of a failing corporation." Dalziel v. Rosenfeld, 265 N.Y. 76, 79, 191 N.E. 841, 842 (1934). It provides, in pertinent part, that:
* * * No conveyance, assignment or transfer of any property of any such corporation by it or by an officer, director or stockholder thereof, nor any payment made, judgment suffered, lien created or security given by it or by any officer * * * when the corporation is insolvent or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporation, shall be valid, except as to any rights or interests which may be acquired thereunder by any person without notice or reasonable cause to believe that such conveyance, assignment, transfer, payment, judgment, lien or security would effect a preference * * *. Every person receiving by means of any such prohibited act or deed any property of a corporation shall be bound to account therefor to its creditors or stockholders or other trustees. * * * Every transfer or assignment or other act done in violation of the foregoing provisions of the section shall be void * * *.
It is applicable to this proceeding by virtue of Section 70(e)(1)
of the Bankruptcy Act which incorporates state law for purposes of enabling the trustee to invalidate a preferential transfer made by an insolvent debtor. The Referee held that there were two such preferential transfers: (1) the mortgages in December 1956,
and (2) the third-party notes in July 1957. The trustee sought to rely on Section 15, because it has a six year statute of limitations, whereas its counterpart, Section 60 of the Bankruptcy Act, has a four month limitation period, and the transfers complained of would be without that period. See Schutte v. Wittner, 149 F. Supp. 451 (E.D.N.Y.1957).
F.D.I.C. offers the following arguments on this petition: (1) Section 15 is inapplicable. (2) If Section 15 is applicable the trustee does not have standing to invoke it. (3) Even if the trustee has standing, F.D.I.C. has not violated Section 15.
APPLICATION OF SECTION 15 TO F.D.I.C.
F.D.I.C. maintains that Section 15 was not applicable to it as a receiver of a national bank and/or in its capacity as a federal agency. Memorandum of Law, pp. 45-58. The Referee held that: (1) F.D.I.C. had waived this "defense" by failing to plead and timely assert it; (2) even if it could be raised, federal statutory law, viz., Section 70(e) of the Bankruptcy Act and 12 U.S.C. § 1819 of the Federal Reserve Act permitting F.D.I.C. "to sue and be sued" compelled application of Section 15. At the outset we note that F.D.I.C.'s contention must be considered on the merits for the reasons stated in its brief (pages 55-58), and for the additional reason that we are charged with the responsibility of affording the proper relief "regardless of the theories urged by the parties." Massachusetts Bonding & Ins. Co. v. State of New York, 259 F.2d 33, 40 (2d Cir. 1958).
While F.D.I.C. had been granted the power to "sue and be sued, complain and defend, in any court of law or equity, State or Federal," (12 U.S.C. § 1819) the substantive law to be applied in such suits is a "federal question." F.D.I.C. v. Rectenwall, 97 F. Supp. 273 (N.D.Indiana 1951). "A federal court sitting in a non-diversity case * * * does not sit as a local tribunal. In some cases it may see fit for special reasons to give the law of a particular state highly persuasive or even controlling effect, but in the last analysis its decision turns upon the law of the United States, not that of any state." D'Oench, Duhme & Co. v. F.D.I.C., 315 U.S. 447, 471, 62 S. Ct. 676, 86 L. Ed. 956 (1942) (concurring opinion, Jackson, J.). This is so not only because F.D.I.C. is a federal agency, but because its enabling legislation contains the provision (now found in 12 U.S.C. § 1819) that: "All suits of a civil nature at common law or in equity to which the corporation shall be a party shall be deemed to arise under the laws of the United States." See 1A Moore, Federal Practice P0.321 n. 23 (1965 ed.). Further, the mandatory appointment of F.D.I.C. as a receiver of an insured national bank (12 U.S.C. § 1821(c)) subjects it to the provisions of the National Banking Act with regard to the liquidation and/or rehabilitation of insolvent banks (12 U.S.C. §§ 191-197).
And "questions concerning the exercise of the power and authority to administer the closed bank's affairs are federal questions." Rosenberg v. Deitrick, 37 F. Supp. 700, 704 (D.Mass.1940).
Where the federal statute makes express or implied reference to state law, there can be no doubt that state law applies.
But where, as here, neither act attempts to define the rights and liabilities of F.D.I.C. in its capacity as receiver, the "answer to be given necessarily is dependent upon a variety of considerations always relevant to the nature of the specific governmental interests and to the effects upon them of applying state law." United States v. Standard Oil Co., of Cal., 332 U.S. 301, 310, 67 S. Ct. 1604, 1609, 91 L. Ed. 2067 (1947). Some of the factors to be weighted are: the need to protect the government purse; the need for uniformity; the source or nature of the right sued upon; the degree of state interest involved; the dependency of the activity on state law;
the conflict if any between state law and federal interests; the degree of specificity found in the federal statute.
The overriding governmental interests calling for the application of a wholly federal rule found in such cases as Clearfield Trust Co. v. United States, 318 U.S. 363, 366, 63 S. Ct. 573, 87 L. Ed. 838 (1943) and D'Oench, Duhme & Co. v. F.D.I.C., supra are in no wise present here. Rather, the rights underlying F.D.I.C.'s liquidation of the Bank's assets find their source in state law. It was subrogated to the rights of the Bank against Anjopa as well as the Bank's other debtors. See Brown v. New York Life Ins. Co., 58 F. Supp. 252 (D.Ore.1944), aff'd 152 F.2d 246 (9th Cir. 1945); 12 U.S.C. § 1821(d). Generally, the receiver of a national bank takes title to the bank's claims against its debtors subject to all the existing rights and equities. Peoples-Ticonic Nat'l Bank v. Stewart, 86 F.2d 359, 361 (1st Cir. 1936). Thus, in Willcox v. Goess, 16 F. Supp. 350 (S.D.N.Y.1936), modified 92 F.2d 8 (2d Cir. 1937) preferential transfers under Section 15 were recovered against the receiver of Harriman National Bank and Trust Company for the bank's prior receipt thereof. In comparison to the D'Oench case where the assignee F.D.I.C. obtained a greater right than its assignor because of the strong federal policy involved,
application of Section 15 in Willcox against the subrogee of the bank's rights was not so repugnant as to upset the usual rule. Conversely, "the National Bank Act confers on the receiver * * * no greater powers than the bank itself had before insolvency * * *." Dunn v. O'Connor, 67 App.D.C. 76, 89 F.2d 820, 826 (1937); Peoples-Ticonic Nat'l Bank v. Stewart, supra. As Professor Moore maintains, "a government corporation as assignee, should obtain no greater rights than its assignor had, except to carry into effect some overriding federal policy beyond the fact of governmental incorporation."
3 Moore, Federal Practice P17.23 at 1402.
We find no reason to grant the stockholders of the Bank a greater percentage of recovery on Anjopa's debt when F.D.I.C. is the receiver than they would have received if the Bank tried to collect in its own right.
The instant transactions are neither federal in character nor do they relate to government property.
Similarly, we find no reason to prefer the Bank (apart from its equitable lien) over other creditors in sharing the remaining assets of Anjopa's estate. No such right is envisioned in the Act. Furthermore, the state has a valid interest in securing the equitable distribution of insolvent estates. Moreover, no federal rule of priority is herewith involved, and the local law does not conflict with the Act. Cf., Rosenberg v. Deitrick, supra. Here, state law has furnished a convenient solution "in no way inconsistent with adequate protection of the federal interest." United States v. Standard Oil Co., supra 332 U.S. at 309, 67 S. Ct. at 1609.
Drawing upon the Bankruptcy Act, F.D.I.C. makes two arguments against the application of Section 15: (1) that Section 70(e) of the Bankruptcy Act does not permit state proceedings against the "United States"; (2) Section 60 is "adequate to protect against any abuse by F.D.I.C. of the rights of other creditors." Memorandum of Law, pp. 49, 51. We disagree.
First, F.D.I.C. is not protected by sovereign immunity as was the United States in the cases cited. See Keifer & Keifer v. R.F.C., 306 U.S. 381, 59 S. Ct. 516, 83 L. Ed. 784 (1939); United States v. Brown, 41 F. Supp. 838 (S.D.Fla.1941); 3 Collier, Bankruptcy, supra PP60.16 n. 3, 60.58 n. 6; 4 Collier P70.92 n. 75a.
Second, reference in Section 70(e) to state law evinces Congressional intent to provide an additional remedy to Section 60.
Thus, the federal policy of the Bankruptcy Act in achieving the equitable distribution of a bankrupt estate is to be achieved with the help of state law. In the instant case, but for the expiration of the four month limitation period of Section 60, these transfers would be struck down under that section. In effect, reference to Section 15 increases that statute of limitation period, a result contemplated by the Act. Cf., Early v. City of Helena, Ark., 87 F.2d 831 (8 Cir. 1937). "Section 70(e)(1) affords a useful weapon for the trustee in those cases where the bankrupt has arranged things prior to four months before the filing of a bankruptcy petition so as to prefer some * * * of his creditors * * *." 4 Collier, Bankruptcy, supra P70.88 at 1721; see also 3 Collier P60.66.
STANDING OF THE TRUSTEE TO PROCEED
A. Existence of a Creditor with a Provable Claim
The right of the trustee in bankruptcy to set aside the alleged preferential transfers in this case is predicated on Section 70(e) of the Bankruptcy Act. This section invests the trustee with the same rights which an existing individual creditor would have under state law to complain of a preferential transfer. Doyle v. Gordon, infra 158 N.Y.S. at 256; Haberman v. Larens Corp., infra; Cardozo v. Brooklyn Trust Co., infra. Having no independent power of avoidance, the trustee is subject to the same limitations as the creditor in whose shoes he is standing. However, assuming the creditor could avoid the transfer, the extent of the trustee's recovery is not limited to that of the creditor's.
Redress under Section 15 is only available to those creditors whose debts accrued prior to the preferential transfers, and the consent of such a creditor to a prohibited transfer, as when the creditors approved the compromise agreement, may bar a subsequent action. In Re Campbell's Estate, 164 Misc. 632, 299 N.Y.S. 442, 448 (Surr.Ct.1937). Further, while an injured creditor cannot sue until a judgment on his debt is obtained and returned unsatisfied, Buttles v. Smith, 281 N.Y. 226, 22 N.E.2d 350 (1939) this is not required of the trustee in bankruptcy. See Sherwood v. Holbrook, 178 App.Div. 462, 165 N.Y.S. 514 (1st Dept. 1917); 4 Collier, Bankruptcy P70.90 at 1728-29 (1962 ed.). The creditor of the transferor need not have a judgment lien prior to the transfer, although his recovery under Section 15 in such a case will be greater than if he had obtained it after. Compare Trustees ...