CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SEVENTH CIRCUIT.
Hughes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone, Roberts, Cardozo
MR. JUSTICE CARDOZO delivered the opinion of the Court.
A trustee in bankruptcy asserts a claim against the receiver of a national bank for the value of property received by the bank as an unlawful preference. The receiver admits the validity of the claim if it is placed upon the same level as the claims of creditors at large. The trustee insists that the claim must have priority on the ground that the avails of the unlawful preference are subject to a trust.
In September, 1928, the bankrupt, John Fitzgerald, had overdrawn his deposit account with the Farmers National Bank of Pekin, Illinois, and was also indebted to the bank upon promissory notes. In response to a demand for collateral security he delivered to the bank notes of other persons, as well as a certificate of stock, the whole of the face or par value of about $35,000. Most of the securities so delivered have been returned to the trustee and are not in controversy now. Four items only are the subject of this suit.
The bank received from Fitzgerald on September 7, 1928, a certificate for ten shares of its own stock, a promissory note of Charles Graff for $3,000, a promissory note of W. C. Sommer for $1,000, and notes or bonds of Veesaert for $5,000, reduced later by $1,597.31 paid upon account. Within a period of four months (on October 26, 1928), creditors of Fitzgerald filed a petition in bankruptcy, an adjudication following in November of that year. No election was made by the trustee in bankruptcy to reclaim the collateral as an unlawful preference till July 20, 1929, or if there was an earlier election, it is not shown by the record. In the meantime the bank, which continued as a going concern until January, 1932, had disposed of three of the contested items of security as follows: On February 9, 1929, after having credited the bankrupt with a dividend of $30, it sold the ten shares of its own stock to one Cullinan, a depositor. The price was $3,000, by concession the fair value. Payment was effected by charging the deposit account of the purchaser with what was owing for the shares. On April 12, 1929, the bank collected $3,183.78 upon the note of Charles Graff by charging that amount against the deposit balance to his credit. On April 16, 1929, it collected $1,059.98 upon the note of W. C. Sommer by a charge against his balance. Nothing was received upon the Veesaert bonds, the fourth contested item, till December,
. The bank then had a payment on account to the extent of $1,597.31, the payment being made by the deposit of a check to its credit in the First National Bank of Chicago, Illinois. The balance in that account was afterwards reduced to $776.57, which latter amount, together with the bonds themselves, the receiver stands ready to transfer to the trustee.
The election by the trustee to reclaim the collateral securities in behalf of the estate was announced, as we have seen, on July 20, 1929, and was manifested by the beginning of a suit for appropriate relief. No charge was made that the transaction was voidable for any actual fraud. The suit was under § 60b of the National Bankruptcy Act (11 U. S. C. § 96) upon the ground that the effect of the transaction was to prefer one creditor over others, and that the creditor, the bank, had reasonable cause to believe that such effect would follow.*fn* Under Schoenthal v. Irving Trust Co., 287 U.S. 92, an action at law could have been maintained for the recovery of the property or its value. Without objection, however, the suit was tried in equity. Cf. Buffum v. Peter Barceloux Co., 289 U.S. 227, 235. It ended on June 24, 1932, in a decree invalidating the transactions of September 7, 1928, as constituting a forbidden preference, and directing the return of the securities, or the value of such as had been converted into money.
During the years of litigation the bank had suffered reverses, and on January 8, 1932, it was closed by the
Comptroller of the Currency. The receiver appointed by the Comptroller was not a party to the suit to invalidate the preference. After the entry of a decree, the trustee in bankruptcy petitioned for an order instructing the receiver that the four contested items were a preferred charge upon the assets, and that payment should be made accordingly. The District Court granted the relief prayed for, and upon appeal to the Court ...