Tennessee

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

K.T. McConnico, Jr. v. Third National Bank in Nashville,
1973.TN.216 (Tenn. 10/15/1973)

SUPREME COURT OF TENNESSEE, AT NASHVILLE

K. T. McCONNICO, JR., TRUSTEE, APPELLEE,

v.

THIRD NATIONAL BANK IN NASHVILLE, APPELLANT

Slip Opinion

1973.TN.216

Date Filed: October 15, 1973

From the Equity Court, Davidson County.

APPELLATE judges:

Allison B. Humphreys, Justice. Dyer, C. J., Chattin, J., McCanless, J., Wilson, S. J., Concurring.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE HUMPHREYS

The appellant Third National Bank in Nashville has filed a petition to rehear seeking to have this Court modify its judgment so as to deny recovery on one check, issued to Clear Creek Coal Company, endorsed in the name of that company by W. T. Hardison, and deposited to his personal account, upon the theory that the transfer did not occur within one year of the filing of the petition in bankruptcy. The check in question was received by the defendant bank on June 27, 1968, in the amount of $ 12,263.30. The petition in bankruptcy was filed on October 27, 1969.

Petitioner agreed with this Court's opinion that § 67d(2)(d) of the Federal Bankruptcy Act disposed of the petitioner's contention that the Trustee in Bankruptcy had no standing to sue without proof of insolvency of W. T. Hardison and Company at the time the checks were negotiated. Petitioner now earnestly contends, however, that the one check in question was deposited with the defendant bank more than one year prior to the date of bankruptcy of W. T. Hardison and Company, and, therefore, it is not fraudulent with the provisions of 67d(2)(d) of the Federal Bankruptcy Act, that section providing as follows:

"(2) Every transfer made and every obligation incurred by a debtor within one year prior to the filing of a petition initiating a proceeding under this title by or against him is fraudulent. . . . (d) as to then existing and future creditors, if made or incurred with actual intent as distinguished from intent presumed in law, to hinder, delay or defraud either existing or future creditors." (emphasis added).

Standing alone, petitioner's contention appears to be valid. But, it is not.

First, the issue of the solvency or insolvency of W. T. Hardison and Company was never raised by the petitioner until the case reached this Court. It was first mentioned by the Court of Appeals, particularly in the Dissenting opinion which concluded that the trustee could not recover because the Federal Bankruptcy Act required an affirmative showing that the fraudulent transfers either precipitated or occurred while the corporation was insolvent. We thought that point important as it appeared to be an affirmative duty of the trustee, and, because of the complicated nature in which Hardison conducted his business and lack of corporate records before this Court, it was impossible to say whether these transactions precipitated insolvency or not. As our original opinion indicates, however, a conveyance made with actual intent to hinder, delay, or defraud creditors, as was the only realistic Conclusion in this case, may be set aside without regard to that showing of insolvency.

What the petitioner has failed to recognize, however, is that the trustee may sue to set aside transfers that are fraudulent as to creditors under either applicable state law, in this case The Uniform Fraudulent Conveyances Act, or under the federal adaptation of that Uniform Act, the Federal Bankruptcy Act, § 67. Jurisdiction to proceed under applicable state law is conferred upon the trustee under § 70e of the Federal Bankruptcy Act. As Collier states:

"Since 70e(1) relates wholly to the applicable state or federal law with respect to the voidability of a transfer or obligation, such law will control as to whether a valid claim and right of avoidance still subsists at the time of bankruptcy in the creditor whose rights the trustee assumes to assert. Thus where the creditor's remedy is barred by the running of the Statute of Limitations prior to bankruptcy, the trustee is likewise barred. Section 70e(1) provides no conditions or time limits within which transactions are deemed voidable. It merely incorporates the applicable state or federal law in this regard. Consequently, the four-month and one-year limitations established in 60 and 67 are inapplicable in a suit under § 70e. Sections 67d and 70e present different and independent methods whereby the trustee may move to invalidate a transfer deemed fraudulent. And the fact that present 67d incorporates much of the Uniform Fraudulent Conveyances Act does not prevent the trustee from invoking a state adaptation of the Uniform Act, where that better suits his purpose." 4A Collier, Bankruptcy, § 70.71, pp. 799-802.

It is apparent from the pleadings in this case that the trustee has, at all times, pursued his remedy in state court under applicable state law, jurisdiction therein conferred by § 70e. Under that section, he must demonstrate that he is asserting the right of a creditor of the bankrupt against whom the particular transfer was fraudulent. Id. at 787. The question of the fraudulent transfer must be determined by the state law governing the transaction. Id.

Our resort to § 67d of the Federal Bankruptcy Act in our original opinion was, then, prompted merely as an interpretative devise of our applicable state law, the Uniform Fraudulent Conveyance Act, T. C. A. 64-301 - 64-321. Section 67d of the Federal Bankruptcy Act condenses the substance of the Uniform Fraudulent Conveyances Act and retained wherever possible both it language and substance. 4 Collier, Bankruptcy, § 67.29, p.475, n.6. Section 67d(2)(d) corresponds almost exactly to our applicable state statute, T.C.A. § 67-315.

Those provisions being almost identical, we used Coller's informative treatise on Bankruptcy to construe our state statute. The resulting construction was both a workable solution to the establishment of actual fraudulent intent, and the proposition that under this particular statute, the trustee was under no duty to show that the transaction either precipitated or was consummated during the bankrupt's insolvency. We might also note here as we did in our original opinion at page 26 that the Discussion at pp. 25-26 with reference to whether the trustee could maintain the suit, the measure of recovery, and its distribution is fully applicable to a proceeding under § 70e as well as § 67d.

Returning to the statute of limitations question, it is clear that our state statutes are dispositive of the petitioner's contention, in that the one year limitation in § 67d(2) of the Federal Bankruptcy Act is not present in the Uniform Fraudulent Conveyances Act. As stated in Davis v. Willey, 45 Am. B.R. 348, 263 F. 588 (D.C. N.D. Cal. 1920), aff'd 273 F. 397 (9th Cir.1921) :

"It is well established that the effect of this section (§ 70e) is to clothe the trustee with no new or additional right in the premises over that possessed by a creditor, but simply puts him in the shoes of the latter, and subject to the same limitations and disabilities that would have beset the creditor in the prosecution of the action on his own behalf; and the rights of the parties are to be determined, not by any provision of the Bankruptcy Act, but by the applicable principles of the common law, or the laws of the state in which the right of action may arise. In other words, the Bankruptcy Act merely permits the trustee to assert the rights which the creditor could assert but for the pendency of the bankruptcy proceedings, . . ." (emphasis added).

In applying the correct limitation period, we look first to our state enactments of the Uniform Commercial Code, T.C.A. § 47-101 et seq. The only possible applicable limitation therein bars in T.C.A. § 47-4-406 but that section is inapplicable in this case as the Clear Creek Coal Company, the creditor whose right the trustee is asserting, does not fall within the definition of a customer. See, T.C.A. § 47-4-104. Even if it could be so construed, the applicable limitation therein, under the facts of this case, would be three years.

The Uniform Commercial Code does provide however, at T.C.A. § 47-3-419 that:

"(1) An instrument is converted when . . . (c) it is paid on a forged endorsement."

We held, in this case, that even while the forged endorsements were effective to pass title under T.C.A. § 47-3-405(1)(b), the defendant bank was liable thereon as they could not qualify for holder in due course status as notice of the irregular nature of the transactions appeared on the fact of the instruments.

The Comments to the Official Text of T.C.A. § 47-3-419 read as follows:

"Section (1)(c) is new. It adopts the prevailing view of decisions that payment on a forged endorsement is not an acceptance, but that even though made in good faith it is an exercise of dominion and control over the instrument inconsistent with the rights of the owner, and results in liability for conversion.

That result would not always hold true in light of T.C.A. § 47-3-405 if a customer of the bank was, in fact, involved. As the Comments to the Official Text of T.C.A. § 47-4-406 point out:

"Nothing in this section is intended to affect any decision holding that a customer who has notice of something wrong with an endorsement must exercise reasonable care to investigate and notify the bank. It should be noted that under the rules relating to impostors and signatures in the name of a payee (Section 3-405) certain forged endorsements on which the bank has paid the item in good faith may be treated as effective notwithstanding such discovery end notice." (emphasis added).

While we treated the forged endorsements as effective in the instant case, and while the defendant bank paid the items in apparent good faith, they are still liable under these unique facts due to the notice apparent on the face of the instruments. We must conclude therefore, that in light of T.C.A. § 47-3-419 the instruments were converted and, absent an appropriate limitation in the Uniform Commercial Code, apply our general limitation period of three years as pertains to the conversion of personal property. See, T.C.A. § 28-305.

It being apparent that the action was timely filed, the petition to rehear is accordingly denied.

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