of Dale Lloyd, a sometime bookkeeper for the corporation, payment of all obligations to defendants, past due, presently due, and not yet due. He further stated that if payment of all such sums was not immediately forthcoming that he, Blank, would institute bankruptcy proceedings and shut down the operation of the business.
23. Dale Lloyd then called Schroeder to the factory and Lester Blank repeated his demands to the latter. He further stated to Schroeder that he knew the names of the principal supplier creditors of the corporation and the amounts due them. The information in that regard which he possessed and made known to Schroeder proved to be accurate.
24. Defendant, Lester Blank, then attempted to ascertain from Schroeder the exact amount of the total liabilities of the corporation and the value of its assets. This information was only partially furnished because the books of the corporation had not been kept up to date and did not then present a complete and accurate picture of the then current status.
25. Lester Blank was told by Schroeder that there was on that day no funds available to pay him but that a check was expected from the corporation's factor on the following day sufficient to satisfy Blank's demands, i. e., to be paid in full.
26. Accordingly, on January 11, 1952, Schroeder made out two corporation checks in favor of defendants, one for $ 1,000 and one for $ 500, gave them to Lester Blank, who, accompanied by Schroeder and Lloyd, went to the Portsmouth bank and received in exchange for the above a cashier's check in the amount of $ 1,948.90 in payment of the two checks and the one for $ 450 which he still held. The $ 1.10 difference involved was the bank's service charge for issuing the check. Blank was also then told that the $ 691.02 check would be paid through regular banking channels from this same factor's remittance and, in fact, this was done on January 12, 1952.
27. When Lester Blank was in the shoe factory, he had opportunity to observe and did observe that the manufacturing operations were being carried on at less than full or usual capacity. He was told by Schroeder that the corporation had insufficient raw materials to maintain full production and that this, in turn, was due to its inability to obtain such materials in the face of refusal of suppliers to extend credit.
28. Blank suggested to Schroeder that they meet in Boston during the following week and that Schroeder should there attempt to persuade some of the supplier creditors to compromise existing obligations, that Blank would try to assist in this effort and, if successful, would then consider putting some cash into the corporation to help it over it difficulties.
29. Upon receiving the cashier's check in Portsmouth, Blank departed for Philadelphia.
30. On January 14, 1952 Schroeder, along with Dale Lloyd and Lester Blank, met in Boston at which time the proposition of Blank coming to the aid of the corporation with cash, if existing creditors could be persuaded to compromise their claims at a sufficiently low figure, was tentatively discussed.
31. On the above occasion Schroeder delivered to Lester Blank a certified check of the corporation in the amount of $ 343.15 which fully discharged all remaining obligations of the corporation to defendants.
32. An audit to determine the exact condition of the Schroeder Shoe Company in the month of January, 1952, was made on or about February 4th or 5th, 1952, reflecting the conditions of the company as of January 19, 1952. This audit showed that Schroeder Shoe Company had total assets of slightly in excess of $ 74,000 on that date and liabilities in excess of $ 103,000.
33. Sales made by the corporation in the period between December 31, 1951 and January 19, 1952 amounted to about $ 21,000, while purchases amounted to about less than $ 5,000. Adjustments, based on these transactions, to the January 19th audit with respect to inventory and estimated cost of sales demonstrate that as of December 31, 1951, the liabilities of Schroeder Shoe Company exceeded total assets by approximately $ 27,000.
34. The Schroeder Shoe Company was insolvent on December 31, 1951 and at all times thereafter.
35. Lester Blank on January 11, 1952 did not know as a fact that the Schroeder Shoe Company was insolvent.
36. John Schroeder, President of Schroeder Shoe Company, on January 11, 1952, did not know as a fact that the Schroeder Shoe Company was insolvent.
37. The several payments of the aforesaid amounts to Edward Blank Sons & Co. by the Schroeder Shoe Company were not intentional fraudulent preferences.
38. Lester Blank, a competent and intelligent businessman, on January 11, 1952, had information to put him upon inquiry touching the debtor's solvency. At that time a diligent inquiry would have disclosed that Schroeder Shoe Company was actually insolvent.
The Findings of Fact in this case, set forth above, were made on a record wherein the testimony of the plaintiff was presented by deposition only and the defense was presented by witnesses, who appeared in open court, testified, and were cross-examined. The Court, therefore, had no opportunity to judge the demeanor and attitude of the absent witnesses. From the entire record, however, I have come to the conclusion that the plaintiff, the trustee in bankruptcy, has by a fair preponderance of the evidence established that the above referred to payments were voidable preferences under the provisions of Section 60, sub. b, of the Bankruptcy Act, 11 U.S.C.A. § 96, sub. b. I am of the opinion that the evidence establishes that at the time Lester Blank collected the checks in question he had reasonable cause to believe that the financial condition of Schroeder Shoe Company was precarious and that the company was at that time insolvent. He then knew that certain checks which he had received were unpaid because of insufficient funds. While in the aggregate the sum total of these unpaid checks was not a large amount, it was direct notice to him of the company's financial difficulty. Added to that was the information given to him that the company was not maintaining and could not maintain full operations because of its precarious credit situation. He was told directly that operations had already been curtailed because other creditors had refused to extend the necessary credit to permit full operation. Under such circumstances the language of Circuit Judge Swan in the case of Pender v. Chatham Phenix Nat. Bank & Trust Co., 2 Cir., 1932, 58 F.2d 968, 970, states the applicable law:
'* * * In preference cases, notice of facts which would incite a man of ordinary prudence to an inquiry under similar circumstances is notice of all the facts which a reasonably diligent inquiry would have disclosed. * * *'
A reasonably diligent inquiry would have disclosed the insolvency of the company and the defendants were under a duty to make such an inquiry. The payments, therefore, constituted voidable preferences which the trustee in bankruptcy is entitled to recover. See Margolis v. Gem Factors Corp., 2 Cir., 1953, 201 F.2d 803.
As to the question of interest on the preferences, there is no testimony showing that any demand was made prior to the institution of suit. Therefore, interest will be allowed only from October 31, 1952, the date upon which suit was instituted in this Court. Waite v. Second Nat. Bank of Belvidere, Ill., 7 Cir., 1948, 168 F.2d 984, 4 A.L.R.2d 322.
Conclusions of Law
1. This Court has jurisdiction of the parties and the subject matter of this action.
2. On January 10, 1952, and thereafter, Lester Blank had notice of facts which, under similar circumstances, would incite a man of ordinary prudence to an inquiry of the financial condition of the Schroeder Shoe Company.
3. A reasonably diligent inquiry would have revealed to the defendants that the Schroeder Shoe Company was insolvent on January 10, 1952 and thereafter, and the defendants are charged with notice of such insolvency.
4. The payments made by the Schroeder Shoe Company to defendant on January 11, 1952 or thereafter in the amounts of $ 1,000, $ 500, $ 450, $ 691.02 and $ 343.15 were preferences as defined in Title 11 U.S.C.A. § 96, subs. a, b.
5. Under the facts found the Trustee in Bankruptcy is entitled to avoid these preferences and to recover the above stated amounts. Plaintiff-Trustee is entitled to judgment in the sum of $ 2,984.17 with interest thereon from October 31, 1952 to date of payment, together with costs.
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