(273 F.)

But as to the $2,755.24 standing to the credit of Cross on the books of the bank on the date of the filing of the petition in bankruptcy, which moneys appear to have been deposited in the usual course of business, it was decreed belonged to the trustee. By a special finding of the master, which was approved by the court, it was found there was no purpose or intent of preferring the bank in the transaction.

One week before the filing of the petition, the bank, after an examination of the bankrupt's books, gave notice to the debtors of the bankrupt that it was the owner of the accounts and that the same should be paid to the bank and not to Cross. On the day the petition in bankruptcy was filed, the bank credited up on the bankrupt's $18,000 demand note the amount of the balance of $2,755.24, and charged the same to Cross' account. Later on the same day the bankrupt gave a check for the amount and delivered it to the bank, together with a new demand note for the difference between this sum and the amount of the demand note, to wit, $15,226.76. This was done for the purpose of obtaining the benefit of the bank's right of a set-off of mutual debts. and credits under section 68 of the Bankruptcy Act. It was held below that, even though such right to a set-off existed between the bank and the bankrupt, and it was conceded that such set-off was permissible under the Bankruptcy Act, still, because of what took place by giving the new note, and because of the agreement existing between the bank and the bankrupt, no such right of set-off existed as against the general creditors of the bankrupt or against the trustee.

Another transaction is the subject of review on this appeal. The bankrupt borrowed from the bank $1,261.31 on a demand note on September 25, 1916, and pledged as collateral security a warehouse. receipt for 205, barrels of flour. The proceeds of this loan were remitted to a milling company in Minneapolis, which shipped the flour to the bankrupt with a sight draft attached to the bill of lading, and sent it to the City Bank of Syracuse for collection. The bank sold the flour on October 16, 1916, and after paying the note had a surplus of $621.61, which it applied to the bankrupt's demand note of $15,226.76. It contends that it was entitled so to do by virtue of section 68 of the Bankruptcy Act. The court below held against this contention, and said that such sum must be paid to the trustee. Section 68 of the Bankruptcy Act (Comp. St. § 9652) provides as follows:

"a. In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.

"b. A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate; or (2) was purchased by or transferred to him after the filing of the petition, or within four months before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent, or had committed an act of bankruptcy."

[1, 2] The cases are in accord in holding that where a bank receives. deposits in the regular course of business, which are subject to withdrawals by check, and there is no collusion or fraud, and where notes have been discounted by the depositor at the bank, it has the right, when notes are due, to set off the amount due to the bank on the notes

against the amount due from it on the deposit account. This right exists, even though the depositor is insolvent when the notes become due, and such insolvency is known to the bank. Continental Trust Co. v. Chicago Title Co., 229 U. S. 435, 33 Sup. Ct. 829, 57 L. Ed. 1268; N. Y. County National Bank v. Massey, 192 U. S. 138, 24 Sup. Ct. 199, 48 L. Ed. 380. And where the set-off exists, and the parties themselves have not voluntarily made such set-off or adjustment before bankruptcy, the trustee must do so. Studley v. Boylston Natl. Bank, 229 U. S. 523, 33 Sup. Ct. 806, 57 L. Ed. 1313.

[3, 4] We find nothing in the agreement between the parties which militates against the view that the relation of debtor and creditor existed between the bankrupt and the appellant. The fact that a check was drawn and payment made, and a demand note given for the difference, does not alter the case. That transaction, occurring on the day the petition was filed, was invalid. The money against which the check was drawn was at all times with the bank, and remained with the bank, and there has been no changing of the relations between the depositor and the bank. If the transaction by which the check was drawn and new note given for the difference was invalid, as a preference, it left the parties in the position they were in prior to such giving of the check and of the note. The purpose of the agreement, by which the accounts were assigned as collateral, was to keep the bank secured as a creditor during all the times money was owing from the bankrupt. The daily substitution of new accounts for old accounts paid and deposited in the bank did not change the relationship, even though the bank lost title or its lien upon the deposit, which it had by virtue of the assignment of accounts. This did not and could not deprive it of the banker's right of set-off.

[5] There were no limitations placed upon the bankrupt's right to check against this account. The bankrupt testified as follows:

"Q. Was there any limitation agreed upon or understood between you and the bank upon your checking power on that account? Were you confined in other words to checks in payment for business indebtedness or were you at liberty to give any checks you pleased? A. There was no definition made at the time. We assumed it was for business checks, or checks to pay bills of business requirements.

"Q. That is, if you wanted to meet a pay roll connected with the business? A. We always issued a check for the pay roll; our salary was agreed upon, and we had our check for our salary, the same as the other help.

"Q. As a business expenditure? A. Yes.

"Q. There was nothing said, however, imposing any other limitation upon the use of that account? A. No.

"Q. What, in fact, was your practice did you draw for other purposes? A. For business purposes only."

There is no evidence which would permit a construction that the deposit was a special deposit, or a trust fund for the benefit of creditors. The relationship thus created, made in good faith and in the ordinary course of business, is no obstacle to the bank's right to insist upon its lien and right of set-off as provided in the bankruptcy statute. In Continental Trust Co. v. Chicago Title Co., 229 U. S. 435, 33 Sup. Ct. 829, 57 L. Ed. 1268, the bank agreed with its depositor, after knowledge of his insolvency, that if he would make deposits for such pur

(273 F.)

poses, it would pay the salaries of clerks, and checks were drawn and paid on various days. The deposits exceeded the withdrawals by check in the sum of $575.79, and the bank claimed the right of set-off of such balance against the depositor's due note. The court, sustaining the claim of the bank, said:

"As to the $575.79, we think the right to set off this deposit is established by the principles laid down in New York County National Bank v. Massey, supra. Here there was a deposit subject to be checked out by the bankrupt for specific purposes. The money was not placed in the bank with a view. to giving it a benefit, except indirectly, because of the deposit. It was subject to Prince's check, and all of it might have been checked out for the purposes intended."

We think the same principle has application to the facts disclosed by this record.

[6] When on October 25, 1916, the bank set off against the amount owed the sum of $661.61, the surplus received from the sale of the flour, it had no reasonable grounds or cause to be charged with the belief that it was obtaining security for its antecedent indebtedness from an insolvent, creditor. While the bank had from time to time examined the books of the bankrupt for the purpose of obtaining a list of the outstanding accounts, there is nothing to show that, at the time the bank. availed itself of this undoubted right, it had knowledge of insolvency. The bankrupt continued to do business, and no evidence was offered indicating that the bank should have made inquiry as to Cross' insolvency. He was not declared insolvent until the 25th of October, 1916, and it was the bank that then found him to be insolvent. The loan for the flour transaction was made in good faith, and was not taken as a preference for a pre-existing loan. The principle of set-off of mutual debts and credits therefore applied. Under the terms of the note given, the right so to do is expressly conferred upon the bank. The decree is reversed.

AMERICAN EXCH. NAT. BANK v. GARVAN, Alien Property Custodian, et al. (Circuit Court of Appeals, Second Circuit. April 6, 1921.)

No. 240.

1. War 12-Alien Property custodian can seize property, notwithstanding error in determining it was enemy owned.

Under Trading with the Enemy Act, § 7, as amended by Act Nov. 4, 1918, 1 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 31151⁄2d), requiring any property, including choses in action, which the President determines belongs or is owing to an enemy not holding a license, to be delivered to the Alien Property Custodian, and section 9 (section 31151⁄2e), providing for claims to property so delivered to the Custodian, which was a war measure intended for an emergency, the Custodian is authorized to seize property which he determines is alien owned, though it may ultimately appear that in fact it belonged to a citizen.

2. War 12-Bank, paying deposit to Alien Property Custodian, is not liable to depositor.

A bank, which pays a deposit to the Alien Property Custodian on the latter's demand, is protected against liability to the depositor by Trading For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

with the Enemy Act, § 7(e), being Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 31151⁄2d, providing against liability for anything done in pursuance of any order under the authority of the act, so that the bank is not entitled to maintain a bill to require the Alien Property Custodian and the depositor to interplead to determine the rights to the deposit. 3. War 12—–Alien Property Custodian can seize debts owing to enemy. Under Trading with the Enemy Act, § 7 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 31151⁄2d), authorizing seizure of enemy property by the Alien Property Custodian, especially since its amendment on November 4, 1918, so as expressly to include choses in action, the Custodian has authority to seize a debt owing to an alien enemy not possessing a license from the President.

4. Courts 405 (5)-Appeal to Circuit Court of Appeals is proper, where District Court maintained jurisdiction.

Where the District Court maintained its jurisdiction against attack, an appeal from a final decree for complainant to the Circuit Court of Appeals was proper.

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

Interpleader by the American Exchange National Bank against Francis P. Garvan as Alien Property Custodian and John Simon. From a decree directing the payment of the fund in controversy to defendant Simon, the Alien Property Custodian appeals. Reversed, with directions to dismiss the bill.

See, also, 256 Fed. 680.

Francis G. Caffey, U. S. Atty., of New York City (Earl B. Barnes, of New York City, of counsel), for appellant.

White & Case, of New York City, for appellee bank.

Henry A. Wise, Cola G. Parker, and Ernest A. Bigelow, all of New York City, for appellee Simon.

Before WARD, HOUGH, and MANTON, Circuit Judges.

WARD, Circuit Judge. December 13, 1918, A. Mitchell Palmer, Alien Property Custodian, made demand upon the American Exchange National Bank to pay over to him a deposit in the name of Simon of some $360,000, on the ground that he had determined it to be owing and belonging to one Albert, an alien enemy not holding a license granted by the President. January 6, 1919, he served another demand, and March 31, 1919, his successor, Francis P. Garvan served still another, differing in no substantial way from the original. Whether described as cash, or as a special deposit, or an indebtedness, or as a chose in action, every one concerned knew exactly what the Alien Property Custodian was demanding possession of.

December 23, the Bank filed this bill, alleging that the Alien Property Custodian had made demand upon it to pay over the deposit to him; that Simon had threatened to hold it liable if it did so pay over the deposit; that it could not determine which owned it; and praying that the court should order the Alien Property Custodian and Simon to interplead and settle their rights to the deposit account, the amount of which it offered to pay into court. January 14, 1919, Simon filed an answer, admitting the allegations of the bill, and asserting his own

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

(273 F.)

title. Subsequently the Alien Property Custodian moved to dismiss the bill for lack of jurisdiction in the court to entertain it.

April 8, the District Judge held that the Alien Property Custodian had no power to seize the bank account or indebtedness, because it was a chose in action, denied the motion to dismiss the bill, ordered the plaintiff to pay the amount of its indebtedness into court, and Simon and the Alien Property Custodian to interplead. May 12, 1919, Judge Augustus N. Hand entered an order substituting Francis P. Garvan as Alien Property Custodian in place of A. Mitchell Palmer, and giving Simon five days within which to amend his answer, so as to allege that the various demands of the Alien Property Custodian were supported by no evidence whatever; in default of such amendment the clerk of the court was directed to pay over to the Alien Property Custodian the sum deposited in court and giving the Alien Property Custodian 20 days from the date of filing the amended answer to plead or move in respect thereto.

May 15, Simon filed an amended answer. June 3, the Alien Property Custodian filed his answer, praying that the court order the clerk to pay over to him as Alien Property Custodian the moneys paid into court, and that Simon be required to assert any right, title, or interest in the same which he may have according to and in compliance with the provisions of section 9 of the Trading with the Enemy Act, and for general relief.

January 7, 1921, the District Judge entered a final decree adjudging that Simon was the owner of the moneys on deposit in court and directing the clerk to pay the same to him less any sum deductible by law. Section 7 of the Trading with the Enemy Act, as amended November 4, 1918 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 31152d), provides:

"If the President shall so require any money or other property including (but not thereby limiting the generality of the above), patents, copyrights, applications therefor, and rights to apply for the same, trade-marks, choses in action, and rights and claims of every character and description owing or belonging to or held for, by, on account of, or on behalf of, or for the benefit of, an enemy or ally of enemy not holding a license granted by the President hereunder, which the President after investigation shall determine is so owing or so belongs or is so held, shall be conveyed, transferred, assigned, delivered, or paid over to the Alien Property Custodian, or the same may be seized by the Alien Property Custodian; and all property thus acquired shall be held, administered and disposed of as elsewhere provided in this act.

October 12, 1917, the President by executive order vested the power of determining what property belonged to alien enemies in the Alien Property Custodian:

"XXIX. I hereby vest in an Alien Property Custodian to be hereafter appointed, the executive administration of all the provisions of section 7 (a), section 7 (c), and section 7 (d) of the Trading with the Enemy Act, including all power and authority to require lists and reports, and to extend the time for filing the same, conferred upon the President by the provisions of said