Bank of Marin v. England

PETITIONER:Bank of Marin
RESPONDENT:England
LOCATION:Samuel Spevack’s Office

DOCKET NO.: 63
DECIDED BY: Warren Court (1965-1967)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 385 US 99 (1966)
ARGUED: Oct 20, 1966
DECIDED: Nov 21, 1966

Facts of the case

Question

Audio Transcription for Oral Argument – October 20, 1966 in Bank of Marin v. England

Earl Warren:

Number 63, Bank of Marin, petitioner versus John M. England trustee of bankruptcy.

Mr. Washburn.

Edgar B. Washburn:

Mr. Chief Justice, may the Court please.

The sole issue that is presented in this case is whether a bank which honors the checks of a depositor is to be held responsible to a trustee in bankruptcy or the depositor if the bank honored the checks after the depositor has filed a voluntary petition in bankruptcy and where the bank had no notice of the bankruptcy.

The facts of this matter are —

Potter Stewart:

No notice and no knowledge.

Edgar B. Washburn:

No notice and no knowledge.

The facts are virtually undisputed.

Between August 27th and September 17th 1963, Marin Seafoods drew and delivered five checks on its commercial count with the Bank of Marin.

These checks were delivered to Eureka Fisheries.

On September 26th, 1963, Marin Seafoods filed a voluntary petition of bankruptcy in the District Court.

Four days later, John M. England was appointed receiver and on October 20th, 1963, he became the trustee.

On October 2nd, 1963, the checks which had previously been drawn and delivered were presented by Eureka Fisheries to the bank for payment.

As of this date, the bank had no notice and no knowledge for the bankruptcy.

There were sufficient funds on deposit.

The bank therefore honored the checks.

Subsequently, the trustee applied to the referee in bankruptcy for a turnover order.

The referee held that the bank and the payee of those checks were jointly responsible to the trustee for the amount of the checks.

Subsequently the payee paid the judgment and has now sought contribution against the bank.

After that occurred the bank petition for review in the District Court ultimately appealed to the Court of Appeals.

In the Court of Appeals, it was held that the lack of notice afforded no protection to the bank because of the wording of Section 70a and 70d of the Bankruptcy Act.

As the contention of the petitioner, Bank of Marin that the application of these two Sections of the Bankruptcy Act by the Court of the Appeals violates due process in two regards.

Firstly, it’s requiring the bank who had previously satisfied its obligation to its depositor to satisfy this obligation without notice a second time.

As a part of that same contention is the second question is that the bank is being compelled to pay the same debt twice.

When the checks were originally presented for payment the bank was discharging its legal obligation to its depositor by honoring the checks.

If the bank is to be compelled to satisfy this obligation again to the trustee, we contend that the bank is in fact being compelled — pay twice.

Is your argument — is only the (Inaudible)?

Edgar B. Washburn:

No Your Honor.

The — in addition to our constitutional argument, we feel that the Bankruptcy Act can there — very reasonably be construed to protect the bank and that this Court need not rule on the constitution argument.

We feel firstly that Section 70d(5), the last sentence in that particular Section which provides that nothing in this Title shall impair negotiability, or currency or negotiable instruments.

Edgar B. Washburn:

We feel that that particular provision forged the bank protection under the facts of this case.

There is very little that we could find that informed us as what Congress specifically intended when they enacted particular provision.

I think that reason dictates that Congress must have had in mind a drawee bank when their particular savings cost was enacted.

The drawee bank is the party that is most frequently going to be involved in the negotiation of checks or in the cashing of checks or negotiable instruments when bankruptcy is involved.

Secondly —

Potter Stewart:

Now, what you say strikes me as correct, as a matter of fact in — that’s the reason I’m surprised that there has not been a lot more case law development of this question, do you have any suggestions to why not?

Edgar B. Washburn:

I think as a practical manner Your Honor, what happened was that prior to 1959, there was a time period between the moment of the filing of a voluntary petition of bankruptcy in between — in the ultimate adjudication.

Other provision to Section 70d would afford protection to a bank during that particular time period.

In 1959, the Act was amended so that adjudication became automatic upon the filing of a voluntary petition.

This was to affect more as a procedural change to relieve the District Court judges of the burden of having to pass on every single voluntary petition.

But it did have the effect of making adjudication automatic.

With that time period gone, there — no longer was any time between bankruptcy and adjudication during which the banks could acquire notice and in the past as a practical manner, banks did get notice.

The trustee would phone them up.

They’d receive a letter and in fact they probably would have gotten notice in this situation such as this where ultimately the bank did get notice in the form of a letter from the trustee.

So I think that explains the reasons for the lack of litigation —

John Paul Stevens:

It’s only been seven years at that time like it hasn’t existed?

Edgar B. Washburn:

Yes, and as pointed out by the amicus curie in this particular case, since this decision in the Ninth Circuit that the Bank of America has had six similar incidents and the Bank of Marin, I know is, has had one.

So that we feel that there is significant burden that’s being placed on the banks by reasoning of this particular ruling.

Referring back again to the negotiability proviso of Section 70d(5), I think it is clear that the drawee bank was intended to be protected.If the drawee bank is not protected, there is virtually no one who is going to be.

The payee of a check generally will be either a preferred creditor or it will be a fraudulent transfer if the transfer occurs so close to bankruptcy that the checks are going to be presented afterwards.

Certainly, possibly other subsequent holders from the payee might be able to for protection.

But the two people that are most intimately involved are going to be most frequently involved would be the payee and the bank.

The payee as I mentioned probably won’t be protected.

The bank by the decision of the Court of Appeals cannot be protected.

Abe Fortas:

The payee did not join in this action?

Edgar B. Washburn:

No Your Honor.

Abe Fortas:

Why do you suppose that they did not?

Edgar B. Washburn:

I have no knowledge one way or the other.

I do know that the payee has informed us, they fully intend to pursue their contribution action against the bank.

Abe Fortas:

Well if we should decide this case in favor of the bank, would our holding necessarily also apply to the payee?

Edgar B. Washburn:

Possibly, I think as a matter of fact in this particular incident — incidence, the payee here was a trade creditor and the delivery of the check to the payee was a preference.

And although this was not the basis for the referee’s decision, I think that the payee would have to return the funds to the trustee in any event.

So I think that the decision of the court for protecting the bank would not necessarily mean that the payee would be left off —

Abe Fortas:

Well, suppose take a case where the payee — the payment to the payee would not have been practiced.

I supposed such a case is (Inaudible).

Edgar B. Washburn:

I would say in that instance Your Honor the payee also would receive protection.

Abe Fortas:

That is to say, if he should hold here that the bank is protected on account of this payment if they did not have notice or knowledge and that would apply also to the payee?

Edgar B. Washburn:

I would say so Your Honor although there is — I think, there is one distinction, banks are in the peculiar situation of dealing with deposits, dealing with vast numbers of checks everyday.

So that the burden that is placed upon a bank to keep itself advised is to whether or not a depositor, any given depositor has gone into bankruptcy is virtually impossible whereas an individual payee who is receiving a check from one person could conceivably in a great deal easier than the bank find out whether this particular person was the subject of bankruptcy.

Abe Fortas:

That would really go to the likelihood — the question whether the payee would have knowledge or not but it would not affect a legal principle involved.

Edgar B. Washburn:

I don’t believe so Your Honor.

In addition to the negotiability proviso that I have just mentioned, I also appeal that the Bankruptcy Act is susceptible to affording protection to the bank on the basis of equity.

The Court of Appeals held that the numerous decisions of this Court and other lower courts that were handed prior to 1938 have no application here because Section 70d undertakes to set forth all of the transactions that are to be protected after the filing of a petition of bankruptcy.

The Court of Appeals also noted in another portion of their opinion that Section 70d in fact has no application to a voluntary bankruptcy because Section 70d applies only in the interval after the filing of a voluntary petition and before adjudication or before a receiver takes possession.

In the situation of a voluntary petition, there is no such interval so that is virtually impossible whether there ever be any instance when Section 70d can apply.

We agree with that particular interpretation of Section 70d except insofar as it relates to the negotiability proviso of Section 70d(5).

That proviso I think on its phase is not so limited in that it says that nothing in this Title shall impair instruments or currency.

And by this Title, it’s referring to Title 11 of the U.S. Code which is the Bankruptcy Act in its entirety.

So we feel that 70(d) in that particular regard is not limited.

However as to the other provisions of Section 70d, it is our position that they have virtually no application in a sit — in a voluntary bankruptcy.

There is therefore no specific provision in the Bankruptcy Act dealing with what transactions are to receive protection after the filing of a voluntary petition.

This stands —

Abe Fortas:

Excuse me, it somewhat — if in this case the payment to the payee would be a preference, would that defense may available to the bank in this contribution action?

Edgar B. Washburn:

I don’t believe so Your Honor.

I think that would strictly be an issue between the trustee and the payee.

There are —

Abe Fortas:

Then on what theory where the bank have to make contribution to the payee?

Edgar B. Washburn:

Basically on the basis of California law which provides that when two parties are held jointly responsible to a third and one pays more than his half or his share, the one paying may seek contribution for the case of two parties, the other half from the —

Abe Fortas:

Yes, but that is — centers a validity of the trustee’s determination of the bank and the payee were liable.

Edgar B. Washburn:

That’s correct.

Abe Fortas:

And that’s the question that you got up here.

Edgar B. Washburn:

That’s correct.

However, if we are seeking to have that particular judgment reversed because of the fact, we don’t feel that the bank should be responsible to the trustee in the first instance.

Abe Fortas:

But that won’t settle the problem of the contribution and the question of preference, won’t it?

Edgar B. Washburn:

Well, I don’t believe that there would be a problem if the bank were not jointly liable.

There would be no contribution claim.

Abe Fortas:

I understand that, but if the bank is jointly liable?

Edgar B. Washburn:

If the bank is jointly liable, no, this decision is not going to affect that.

Abe Fortas:

They won’t preclude the making of the defense.

Edgar B. Washburn:

It won’t preclude it —

Abe Fortas:

(Voice Overlap)some way that the payee can annoy that — the payments, because of its preference.

Edgar B. Washburn:

I don’t believe it will preclude it from asserting the defense You Honor.

However, I don’t think that we would be able to prevail in asserting that particular defense.

William J. Brennan, Jr.:

Well if — if the money, the bankrupt’s money is paid out of the bank upon the payment of the check, that’s after bankruptcy, right?

Edgar B. Washburn:

Yes.

William J. Brennan, Jr.:

Now, is any transfer of the — that you know of, of the bankrupt’s property after the date of filing a petition ever a preference?

I mean technically called a preference?

Doesn’t — isn’t it just the case of somebody appropriating the assets of the bankrupt?

Edgar B. Washburn:

That’s true Your Honor.

William J. Brennan, Jr.:

And the trustee then is obligated to seek an alternative order if somebody’s appropriate in the bankrupt’s property after the date of bankruptcy?

Edgar B. Washburn:

That’s correct.

William J. Brennan, Jr.:

You don’t have to go around and prove the other elements with preference to get the money back, do you?

Edgar B. Washburn:

No, if the Act means that there is virtually no transfer of the bankrupt’s property with or without notice after bankruptcy, that’s valid against the trustee.

William J. Brennan, Jr.:

But the trustee — this property supposedly came the trustee’s property as to the date of the filing of the petition.

Edgar B. Washburn:

That’s correct.

William J. Brennan, Jr.:

And if some property was transferred afterwards, he doesn’t have to get — in order to get it back proves that the elements of the preference, does he?

Edgar B. Washburn:

No Your Honor.

But our contention is this, that in — with respect to a person in the position of a bank who is holding the –.

William J. Brennan, Jr.:

Oh, I understand —

Edgar B. Washburn:

But they have to have notice before they can be held responsible.

William J. Brennan, Jr.:

But how could there be a preference in this case at all in this circumstance?

Edgar B. Washburn:

Oh, I think there was a preference because the checks were delivered prior to bankruptcy.

There were — the checks were withdrawn and delivered —

Byron R. White:

(Voice Overlap) his money?

Edgar B. Washburn:

Regardless of money after bankruptcy when the bank —

William J. Brennan, Jr.:

I know but the judgment here is randomly, just turn on an order or else he gets both the bank and the payee.

Edgar B. Washburn:

Yes.

William J. Brennan, Jr.:

And that means, as far as I concede that that both of them are responsible for appropriating the bankrupt’s property to the trustee’s property after bankruptcy.

Edgar B. Washburn:

That’s correct.

William J. Brennan, Jr.:

Not a preference?

Edgar B. Washburn:

No, I meant to make this clear that we — the referee did not base his decision on the grounds of a preference.

Its my opinion —

William J. Brennan, Jr.:

(Inaudible)

Edgar B. Washburn:

— that it was a preference.

William J. Brennan, Jr.:

I wonder if he could under these facts.

Edgar B. Washburn:

It would be my opinion that he could since the checks were delivered prior to bankruptcy.If they’ve been delivered afterwards it might —

Byron R. White:

That’s not the property that they –.

The money —

Edgar B. Washburn:

But they’d gone through —

Byron R. White:

A finding — an order of (Inaudible) property.

Edgar B. Washburn:

Well, you get into the — to this — where — when the provisional credit was given on the payee’s account with his bank going through the whole collection of the circle.

Byron R. White:

I see.

Edgar B. Washburn:

The record does not reflect when all of these various transactions took place.

In any event we do feel that the inconsistencies in Section 70d in effect remove any specific provision in the Bankruptcy Act in the case of a voluntary petition with respect to what transactions are going to receive protection.

This places the Act in essentially the same postures that was prior to 1938 when Section 70d was originally enacted.

As of that date, there were numerous cases which protected innocent third parties dealing with the bankrupt’s property after the filing of a petition.

There were also a substantial number of cases which protected banks.

And we would urge the court that these cases can be considered and that the doctrine, the equitable doctrines that were put forth in this cases are our basis for interpreting the Act in the position favorable to the bank.

The specific cases dealing with banks protected the bank basically because it was virtually impossible for the bank to acquire a notice of the bankruptcy.

It was purely an equitable argument that — it was stated that it would — to put the burden on the bank of having to ascertain whether every depositor had or had not filed a petition of bankruptcy prior to honoring a check was impossible and unreasonable.

Edgar B. Washburn:

And therefore protection was afforded.

I admit that —

Hugo L. Black:

(Inaudible)

Edgar B. Washburn:

Pardon me Your Honor?

Hugo L. Black:

What happens to the payee in this law suit?

Edgar B. Washburn:

In this particular law suit?

Hugo L. Black:

Yes.

Edgar B. Washburn:

The payee eventually paid the trustee.

Hugo L. Black:

Is what?

Edgar B. Washburn:

The payee paid the trustee with the amount of the judgment and then filed a notice of contribution against the bank.

And in the Ninth Circuit action was requested to file a brief with the Ninth Circuit informing it of what its intent was and it informed the Ninth Circuit that it intended to pursue its remedy of contribution against the bank but that it was withholding further proceedings pending resolution of this particular petition.

So that question hasn’t been resolved.

Earl Warren:

What is the interest of the trustee if he’s been paid?

Edgar B. Washburn:

Presumably the interest of the trustee is to establish a holding that banks are going to be held responsible in this type of situation.

In this particular situation, I think it’s obvious that from purely a monetary point of view, the trustee probably has nothing to lose other than whatever cost might have been incurred.

Hugo L. Black:

He has his money.

Edgar B. Washburn:

That’s correct.

Hugo L. Black:

Well, then do we have a case or controversy between the trustee and yourself?

Edgar B. Washburn:

I believe so Your Honor.

We feel that this particular controversy as to the bank is not moot in any respect and that the only way that we have of protecting ourselves is to contest the original decision imposing liability upon the bank.

Earl Warren:

Well, I wouldn’t — I wasn’t assuming that you’re going to moot your case and leave a stand.

But I was just wondering what interest the trustee in bankruptcy can have against the bank if the trustee is already been paid in full fault by the payee?

And the trustee says that in either his only interest in this case is costs, it isn’t the imposition of cost against him on the Rule 57.

And if so, I wonder if (Inaudible) merely that distract the question, I mean, if the trustee is right?

Edgar B. Washburn:

Well, if the trust — I don’t think it’s an abstract as far as the bank is concern that we are the one that petitioned.

That’s right.

Edgar B. Washburn:

We feel that this is the only way that we can review the particular decision which — has imposed liability against us.

Abe Fortas:

You usually have two parties.

Edgar B. Washburn:

Well, we —

Hugo L. Black:

But why (Voice Overlap) —

Edgar B. Washburn:

The trustee has resisted —

Hugo L. Black:

Why in the real lawsuit needs to be tried, the other one between the bank and the payee?

But why is in this just an indirect method of giving up a case when its all really a — can cause a litigation between them?

Edgar B. Washburn:

Because Your Honor we feel that under — in California law that the judgment holding the bank — jointly responsible with the payee is res judicata as to the — that particular issue.

Hugo L. Black:

But suppose that should be moot or that the judgment should be vacated as moot?

Edgar B. Washburn:

Perhaps we would be back starting all over again.

Hugo L. Black:

You’ll have your lawsuit then with the payee.

Edgar B. Washburn:

I still think that the only that we can protect ourselves in this particular instance is to contest the original jury, the original judgment.

Hugo L. Black:

Is the payee or is that responsible financially?

Edgar B. Washburn:

I have no knowledge if it is a company, I think it is doing quite well.

I have no actual knowledge —

Hugo L. Black:

And you really have a litigation here now, it’s between the bank and the payee.

I mean that’s where the real lawsuit is because the trustee has its money.

He is in no danger of losing his money.

Edgar B. Washburn:

He is not, but the bank certainty is.

Hugo L. Black:

That — that’s right, the bank and — quite between the bank and the payee.

Edgar B. Washburn:

But then the same question may arrive in a suit against the bank and the payee whether the trustee can be foreclosed against holding the bank responsible.

In other words, the bank’s main contention is that you’d never be held responsible to the trustee in the first instance.

Now I doubt whether in a suit against the payee only whether the bank could alter the judgment holding it responsible or could affect the trustee’s rights against the bank.

Hugo L. Black:

Isn’t that at all with the judgment but the judgment might be dismissed as moot, vacated as moot since there’s no controversy there between the trustee and anybody.

Trustee has its money.

Edgar B. Washburn:

But in the —

Abe Fortas:

Would that cause — if you win — but if you win this suit?

Edgar B. Washburn:

We would certainly have a — a certain cost.

Byron R. White:

You asked if the cause against the trustee is moot?

Edgar B. Washburn:

Yes we have.

There is a monetary interest in the trustee in that respect.

I would say this that the interest of the trustee is probably no different that any other person who has won a case, has collected the money and the person who paid is — has been — sought for review.

And as long as the petitioning party doesn’t pay voluntarily, this Court has held that it’s not a moot question.

Byron R. White:

But you did not pay them.

I didn’t pay at all.

Edgar B. Washburn:

We didn’t but I think that the fact that a person paid and then seeks contribution from you should not preclude —

Byron R. White:

A judgment ran against you, isn’t it?

Edgar B. Washburn:

Yes it did.

Byron R. White:

But has been discharged since this happened by the payment of the trustee.

Edgar B. Washburn:

No it has not.

The judgment —

William J. Brennan, Jr.:

I mean, that may not formerly have been.

The judgment I gather against the two has now been paid by your codefendant having paid the trustee.

Edgar B. Washburn:

But under California law the judgment is not discharged if the trust — if the payee asserts contribution in that particular manner in which the payee has —

Well, the purpose of the contribution is?

Edgar B. Washburn:

Would be to recover half — the money that the payee has paid from the bank.

William J. Brennan, Jr.:

Yes, but that’s the limited extent to which the judgment survives, isn’t it?

Edgar B. Washburn:

Yes, but the judgment does survive.

In fact that the payee paid has not discharge the judgment.

Abe Fortas:

Can we decide in this case the liability of the payee as related to the bank.

Edgar B. Washburn:

We’re not asking you to make that decision Your Honor.

We feel that that will be — would be resolved if the bank — if this Court should decide that the bank was not properly held responsible in the first instance, that question would be resolved.

Abe Fortas:

But if — but nothing, what would change if the court agreed with you and said the bank is not liable at all.

And we handed down a mandate in that effect.

Nothing happens?

Then nothing happens, is the — the money that the trustee got, he keeps.

The money that the payee has got, he — doesn’t get back?

And he may still go on with his lawsuit against you in the California Courts.

Edgar B. Washburn:

We would certainly have a defense to it.

The fact to it —

That’s all (Voice Overlap) —

Edgar B. Washburn:

— (Voice Overlap) the basis (Inaudible).

Well, we —

Hugo L. Black:

What is out mandate and the judgment before us is what?

Hugo L. Black:

A judgment against both —

Edgar B. Washburn:

A running against both.

Hugo L. Black:

— (Inaudible)

Edgar B. Washburn:

We would have —

Hugo L. Black:

What do we do?

We set aside the judgment if you prevail only as against the bank,

Edgar B. Washburn:

As against the bank.

Hugo L. Black:

Of course the payee didn’t appeal or did he?

Edgar B. Washburn:

No it hasn’t Your Honor.

Abe Fortas:

Oh, as far as he’s concerned, he didn’t file.

Edgar B. Washburn:

It is of course the payee’s concern.

Byron R. White:

Except if —

Abe Fortas:

He’d be liable for the cause, wouldn’t he?

Edgar B. Washburn:

I’m not sure whether he’d be liable for our cause in this particular — that we have incurred by virtue of a petition, I just do not know.

William J. Brennan, Jr.:

Well supposed that if we did this, then what survives in the way of a judgment which supports the payee’s contributions suit against the bank.

Edgar B. Washburn:

Nothing.

Under the California law, is that (Inaudible)?

Edgar B. Washburn:

Yes, so there were basis of the contribution suit is the fact that there is a joint judgment running against both the payee and the bank.

And it survives after payment by one of the joint —

Edgar B. Washburn:

Yes.

— (Inaudible) or whatever they are.

Edgar B. Washburn:

Right, as long as the joint judgment.

But even —

But if we set it aside, it’s against, then there’s no —

Edgar B. Washburn:

There’s no joint judgment and no right of contribution.

The bank would —

Then that —

Edgar B. Washburn:

Nothing would happen.

Earl Warren:

(Inaudible) then the judgment, what’s left, it wouldn’t be discharged by the (Voice Overlap) —

Edgar B. Washburn:

It would have — would already been discharged by the payment to the trustee.

Edgar B. Washburn:

Thank you.

William J. Brennan, Jr.:

And the trustee loses the cause that we decide in favor of the bank.

Edgar B. Washburn:

I think so sir.

Earl Warren:

Mr. Donovan.

Thomas B. Donovan:

Mr. Chief Justice and may it please the Court.

I’d like to begin by responding to the questions that were asked.

I think that first one that I should respond to is the question of contribution under California law.

I would take issue with the position taken by the petitioner in his reply brief in which he cites a number of cases which set forth the existence of a right to contribution in favor of a joint obligor under a judgment who has satisfied the judgment against other obligors on the judgment who have not paid any share of the judgment to the cases or the cases universally set forth the proposition is that the person seeking contribution is entitled to recover from the nonpaying obligor his proportionate share.

They don’t say one half or a fractional share equal to the number of parties involved in the case.

They say his proportionate share.

And two the case cited by the petitioner, Davis against Heimbach involved a case where execution was issued without any showing whatsoever on the part of the paying judgment obligor seeking contribution.

It simply applied to the court for a writ of execution and it was granted.

That was reversed on the ground that there has to be a showing.

There has to be a notice and opportunity for a hearing before contribution can be issued against the nonpaying joint obligor on a judgment.

A second case illustrates this equally well, this was Starz (ph) against Fletcher where after a hearing the court issued a execution in favor of the party seeking contribution against the nonpaying party.

But the order contained no finding, no basis for a judicial conclusion that a contribution was required.

And again the appellate court found that you have to make some positive showing as to what the proportionate share of the nonpaying joint obligor on the judgment is.

Earl Warren:

May I ask what is your interest in the outcome of the suit?

Thomas B. Donovan:

Well, I am here Your Honor for two reasons, one as an officer of this Court and as an officer of the bankruptcy court.

We began these proceedings by filing an application for turnover order against the Bank of Marin and against the Eureka Fisheries.

When we discovered the facts to be as they were the money of the bankrupt estate had been paid out after bankruptcy we examined the situation and found these two potential parties responsible.

In our view we filed an application and it resulted in the judgment that is now being reviewed and we feel an obligation to continue through to the end even though we’ve already received a full payment from Eureka Fisheries to see this case through to the end.

Earl Warren:

In other words, you want some guidelines on how you shall act in the future?

Thomas B. Donovan:

Yes, that’s the second half of it Mr. Chief Justice.

This case is —

Earl Warren:

And that is advisory verdict revised with the judgment?

Thomas B. Donovan:

I do not believe sir, Your Honor for this reason I agree 100% with the court that there is nothing that we can gain by your decision in this case.

There is no case or controversy as far as the trustee is concerned except insofar we are responsible for cause in a hearing before this Court.

I agree with the petitioner however that this is the only place he can seek review.

He has —

Earl Warren:

Well, now you’re pleading for the petitioner?

Thomas B. Donovan:

No, I’m simply accepting his position as far as this — your question goes.

If this Court does not rule on this question, the judgment holding the petitioner jointly liable to the trustee becomes final and that judgment cannot be reviewed in any other court.

Now if that happened, the Eureka — now speaking hypothetically, Eureka Fisheries would file either an action or an application — a notice or motion for the writ — for the issuance of a writ of execution by a virtue of the California law of contribution.

In that proceeding —

Earl Warren:

And that distresses as a trustee in bankruptcy?

Thomas B. Donovan:

No, that doesn’t bother me a bit.

That that is — that’s why I say it’s immaterial as far as we’re concern.

What does concern me though is this, if this Court — it would not concern me if this Court failed to rule.

But if this Court did rule, it would concern me very much if we didn’t do the utmost to protect trustee’s position in this in this case.

Because I believe the issue involved here is of fundamental importance in the administration of bankruptcy.

Byron R. White:

You mean whether you have to go after the — whether you can go after the bank rather than the payee?

Thomas B. Donovan:

Well, that question is not here, the question is whether we can go after the bank because then —

Byron R. White:

You want to be able to go after the bank?

Thomas B. Donovan:

Yes.

Byron R. White:

That is, you want to be able to — you don’t want to be left if you can go after anybody to be go — to go after the payee?

Thomas B. Donovan:

Yes.

Byron R. White:

You want to — all is to be able to go to the bank and let the bank chase the payee?

Thomas B. Donovan:

If the bank is liable under the statute we do not want our right as attorneys for trustees to be precluded.

Byron R. White:

Well, do you think one reason for this is that unless you can — and that this — that if you can go after the bank, the bank pays you the money and the bank — the money that the bank has paid the payee remains with the payee and the bank can’t get it back which means there’s some — well, that’s the claim against the assets.

Thomas B. Donovan:

Yes Your Honor.

Now —

Byron R. White:

That really — I mean it, the reason it really does do some good is — it is because the bank does pay twice.

Thomas B. Donovan:

The bank is a better defendant in any lawsuit as far as solvency goes than most other defendants.

Byron R. White:

You mean, what — it could afford to pay twice?

Thomas B. Donovan:

No, that is not what I said.

A bank by —

Byron R. White:

This kind of a lawsuit only comes up when the bank has already paid the payee?

Thomas B. Donovan:

Yes Your Honor, but it might very well come up in a situation where the — for example in this case we had four people that we could have pursued.

We could have pursued the bank — Marin Seafoods, the bankrupt itself but that was a corporation and a corporation after bankruptcy isn’t a very attractive defendant.

Thomas B. Donovan:

We could have sued the officer of the Marin Seafoods who actually went out and collected this receivables, took them down, deposit it and — and deposited them in the Bank of Marin after bankruptcy and then we could have gone after him because this was a fraud on the estate.

We could have gone after Eureka Fisheries but again there’s a corporation —

Byron R. White:

A simple case is just where there are some checks outstanding at the time of bankruptcy.

Difficult case and the bank pay as they are presented to the bank, and they’re paid.

Thomas B. Donovan:

Yes.

Byron R. White:

And — was then — then the payee pockets the money and the trustee finds out that the check has paid after bankruptcy and he asks for the money back in the bank.

And he wants the money back from the bank and if the bank pays it, what’s the bank’s cause of action against the payee?

Thomas B. Donovan:

The bank’s cause of action against the payee Mr. Justice White is for — as we point out in our brief, it’s paid out money under a mistake of fact.

The payee as a result has been unjustly enriched because this — at the time the money was paid out by the bank these were assets not of the bankrupt or not of the bank or not of the payee but these were assets of a bankrupt estate.

Byron R. White:

Now, but the payee is liable to say, “Well, now look, at the time I got the check, bankruptcy has not been filed and it was a cash sale.

I sold the bankrupt some property and he gave me the check, a cash sale.”

Thomas B. Donovan:

Yes, now this —

Byron R. White:

And the bank — and he says, “I didn’t — I should be able to keep the money.”

Thomas B. Donovan:

Your Honor you’ve led me into the answer to your question which you had asked my opponent, wasn’t this a preference of the — this question is not involved here.

The law however is that when a check is delivered in payment of goods, even though the checks may not be presented for several weeks or days, it is not a preference.

The —

Byron R. White:

Alright.

Thomas B. Donovan:

It’s a — it is considered a cash payment.

Byron R. White:

Alright, so in that case, in my case where the payee has made a cash sale before or a cash — yes, say under bankrupt, just before bankruptcy.

He gets the check for it, was presented to the bank, the bank place it after bankruptcy.

The payee is not going to be able to keep that money.

Thomas B. Donovan:

Unless — that’s right, that’s right.

He might be able —

Byron R. White:

And then you wanted — you want — you have to be able to get the money from the bank?

Thomas B. Donovan:

But you see — that again is not this case Your Honor, this case — there was no money in the bank at the date of bankruptcy.

Byron R. White:

Yes, but the rule, it’s established (Inaudible) for that case.

Thomas B. Donovan:

No, this is precisely why I believe that the Section 70d(5) provides that nothing in this Act shall impair the negotiability of currency or negotiable instrument.

Now the payee in the situation that you’ve described, is let’s say a holder of a negotiable instrument.

He has no notice of any defense and he is holder in due course and here there is an intervening act, bankruptcy.

The question is, What are his rights?

Thomas B. Donovan:

Are they determined under bankruptcy law?

Are they determined under the law of negotiable instruments?

And we’ve got an — a conflict here.

There are two very complex systems of law at work, one, bankruptcy, the other, the law of negotiable instrument.

The law in this case I believe although I have with my —

Byron R. White:

Did they pay the holder in due course?

Thomas B. Donovan:

The payee would be a holder in due course and he would have — he may be — also the recipient of a preference, he may not be, that we do not know but if he is, he’s going to have to pay back under the bankruptcy law even though under negotiable instrument law he’s a holder in due course if he is not the recipient of a preference.

Let’s assume he is not the recipient of a preference then he prevails because the transfer was not a preference under the bankruptcy law.

Byron R. White:

And the bank must to pay two.

Thomas B. Donovan:

The bank has to pay for this reason Your Honor because at the time of bankruptcy these assets if we may speculate about what happened here and I think we have to.

These assets were not in the bank.

They were not in the hands of the payee.

They were not in the hands of the bankrupt.

They were in the hands of parties unknown who owed money to the bankrupt.

After bankruptcy the bankrupt went out to his creditors fraudulently told them, “I am here on behalf of Marin Seafoods.”

He failed to disclose to them that Marin Seafoods was now a bankrupt.

He said, “You owe me $2300.

Pay me.”

They paid.

He took the proceeds and he deposited them after bankruptcy in the Bank of Marin.

So these funds came into the bank after bankruptcy.

And is the statute is quite clear that no transfer after the date of bankruptcy shall be valid against the trustee.

Hugo L. Black:

Would you be making up this argument though if in fact the deposits had been made before bankruptcy?

Thomas B. Donovan:

No, I would make the same argument, yes.

Because the law covers both aspects but if it was a deposit before bankruptcy I think we might get into questions under 70c which are not presented.

Byron R. White:

The fact — that in this case the —

Thomas B. Donovan:

Yes.

Byron R. White:

— deposit were in fact made after bankruptcy is immaterial on legal questions?

Thomas B. Donovan:

Yes, yes sir.

Byron R. White:

What you are saying in effect is as a bank, even though it knows nothing about bankruptcy is liable to pay valid checks with which the depositor has presented — paid to somebody and presented to the bank.

Thomas B. Donovan:

Yes Mr. Justice White.

Byron R. White:

Makes no difference whether it knows it or not?

Thomas B. Donovan:

Precisely.

Byron R. White:

May I ask you something about the judgment?

The judgment provides — the judgment against the bank a loan, $700.47, surviving judgment against both the bank and the payee $2312, what’s the — what’s the cause of that?

Thomas B. Donovan:

Yes, to go off the record again sir, the bank or we don’t have to go off the record, it is in the record.

Byron R. White:

It’s on the record?

Thomas B. Donovan:

Yes.

Justice Douglas::

As I understand (Inaudible).

Thomas B. Donovan:

On Oct — September 30th, 1963, John England was appointed as receiver and at that time examined the record in the bankruptcy court and he determined that there was a bank account in the Bank of Marin and he sent a notice dated October 2nd to the Bank of Marin.

And you’ll notice that October 2nd is the day that the bank paid out to Eureka Fisheries $2300.

Byron R. White:

Well, what about the 700?

Thomas B. Donovan:

Now, on October 3rd, the bank received the notice from Mr. England and notwithstanding it had notice of the bankruptcy, it continued to honor checks against this account to the tune of $700.

So —

Hugo L. Black:

Has the bank appealed that part of the judgment?

Thomas B. Donovan:

No, the bank has paid that part of the judgment.

Hugo L. Black:

So that we on there — the $2000 judgment.

Thomas B. Donovan:

Yes sir.

Hugo L. Black:

What would happen if we were to — got told there that the bank is not liable?

Thomas B. Donovan:

The Court of Appeals asked us same question on argument and it asked for further briefs on that particular question.

It ultimately ended up ruling without deciding this collateral question of contribution and it decided the case on the issue as it had been presented in our original briefs.

Now, I believe what would happen Mr. Justice Black is that the Eureka Fisheries would bring or pursue its action for contribution against the Bank of Marin and —

Hugo L. Black:

Suppose we hold the bank is not liable?

Thomas B. Donovan:

Is not liable.

Hugo L. Black:

Yes.

Thomas B. Donovan:

Well this would be very serious.

Hugo L. Black:

That is very serious.

Thomas B. Donovan:

Not — it would not be serious — I didn’t mean to be funny.

It would not have any bearing on the trustee in this particular case.

It would have a tremendous bearing on bankruptcy cases dealing not only with bank —

Hugo L. Black:

Well, you’re not thinking of the payee, not very serious for him, you mean very serious in the bankruptcy law.

Thomas B. Donovan:

Yes.

Hugo L. Black:

That’s —

Thomas B. Donovan:

Yes.

Because what we’re concerned with here is the rights of —

It would release a bank from being liable under the law of bankruptcy, is that what would be so seriously?

Thomas B. Donovan:

It would be — it would release a person who holds assets of a bankrupt estates from accountability to a trustee in bankruptcy —

Byron R. White:

Can we —

Thomas B. Donovan:

— and thereby impair the rights of creditors generally.

Hugo L. Black:

Until he had notice.

Byron R. White:

Until he has notice.

Thomas B. Donovan:

Until he has notice, that is right.

Now perhaps —

Hugo L. Black:

What’s so serious about that?

Thomas B. Donovan:

Perhaps the answer — I can answer your question but it will take a little while and perhaps I should I do so.

Prior to 1938, Section 70a of the Bankruptcy Act provided that as of the date of adjudication, the trustee shall be vested with title to the bankrupt assets.

Now this rule, this statutory rule that has been on the books for many years resulted in two difficulties both of which the court attempted to deal with.

Number one, there was this difficulty, bankruptcy normally means that as of the date of a filing of a bankruptcy petition, the bankrupt is dead as far as its assets go.

He has — he is able to begin a new life free from his obligation, the proceeded bankrupt in large part.

He has a fixed cutoff date for this.

Now in return, his creditor’s rights are fixed as of the date he files his petition and if he has assets of whatever kind but are not exempt then those creditors have rights which are determined under the Bankruptcy Act to a ratable distribution of all the bankrupt’s pre-bankruptcy assets.

This gets into the law of preference and the law of fraudulent conveyances and it gets into the laws of exemptions but notwithstanding that the bankrupt is free as of that date from certain of his obligations, his creditor’s rights are established as of that date to a certain of his asset.

Now this privilege date is a fund — as fundamental to bankruptcy law as the date of debtors to probate while you just have to have a —

Hugo L. Black:

But in this world of ours, sometimes more than one person (Inaudible).

Thomas B. Donovan:

That’s right

Hugo L. Black:

That is more than one person interested in this bank.

Thomas B. Donovan:

There are —

Hugo L. Black:

That is the bank, it has the account.

Thomas B. Donovan:

They are all the bank’s creditors.

Hugo L. Black:

What would be so outrageous about holding if the bank — it doesn’t have to be responsible and that they had knowledge of the bankruptcy?

Hugo L. Black:

I don’t suppose to pay off this money.

It’s an obligation to pay the money when he gets to (Inaudible).

Thomas B. Donovan:

No, that is not right.

It is not under the obligation, it is under an obligation to pay the many to the trustee.

The bank, it — its paying —

Hugo L. Black:

Well, it is if you hold that he has got to pay to the trustee without knowing it.

Thomas B. Donovan:

Well —

Hugo L. Black:

Knowing it that there is a trustee.

Thomas B. Donovan:

Now the conclusion that the bank is obligated to pay the money is based on the premise that the bankrupt who deposit the money there has a power to draw against the — or the right to draw against that account on an order.

Hugo L. Black:

He says he did.

Thomas B. Donovan:

But that right ceased as of the moment of bankruptcy.

Byron R. White:

Normally, say in a reorganization or in some bankruptcy, the longer the adjudication is, there is an issue of an injunction.

Is anybody transferring a property of the bankrupt?

Or is it a Chapter X case?

Anyway, you suppose the bank is — suppose the bank in those circumstances would be subject to contempt —

Thomas B. Donovan:

If the (Inaudible)

Byron R. White:

— without notice?

Thomas B. Donovan:

No Your Honor.

Byron R. White:

But it would be responsible for the property.

Thomas B. Donovan:

Because of the different development of 70 — Section 70 of the Bankruptcy Act.

Now as the —

William J. Brennan, Jr.:

Suppose —

Thomas B. Donovan:

This Court —

William J. Brennan, Jr.:

Suppose in this case the bankrupt had sent the bank $2300 in cash and said please pay off Eureka Fish Market, we owe them $2300.

Sent down cash and everything that happened here, it happened and the bank without knowledge of the bankruptcy pays the $2300 cash to Eureka, would you still have a (Inaudible)?

Thomas B. Donovan:

I believe so Your Honor.

Now —

Byron R. White:

When in due course does the bank — whether a bank get notice?

Now, you — this is a voluntary petition, they have various schedules of the voluntary petition.

Thomas B. Donovan:

Yes Your Honor.

Byron R. White:

And that shows — and it — and you itemize your inventory, your assets, don’t you?

Thomas B. Donovan:

Yes Your Honor.

Byron R. White:

And you list your — the people that you owe.

Now for the first reading, I supposed that for the voluntary petition, what happens then, notice wise, in an ordinary court?

Thomas B. Donovan:

Well, it’s related again to this case.

Number one, it does appear on the record that the trustee sent a notice.

The ref — the receiver sent a notice on October 2nd which was received and —

Byron R. White:

Why?

Thomas B. Donovan:

Because he was concerned that these assets were in the bank and might be disbursed.

Byron R. White:

(Voice Overlap) I’m just saying that in the normal bankruptcy, doesn’t it — that the — when there’s any aspects revealed, what happens about loading, you know that paper notice to the first meeting of creditors, you know that.

But is that normally the first to know as opposed to anybody?

When would the bank normally get notice if ever?

Thomas B. Donovan:

The bank normally would get its notice from the receiver but that’s not because of any —

Byron R. White:

Yes, but there aren’t receivers all the time, they are only —

Thomas B. Donovan:

No and that is exactly why the notice requirement is so difficult because if the bank was free to do as it thought proper with this assets regardless of bankruptcy —

Byron R. White:

Until noticed.

Thomas B. Donovan:

Then these rights that are established as of the date of the bankruptcy remained in limbo until he receives notice.

And that notice might come in a day.

It might come with a phone call —

Byron R. White:

Yes, in a case where there is not a receiver, I supposed the notice would come from a trustee for the trustee is charged with collecting the assets to bankrupt and as soon as he deployed it, his jobs to go and make sure that the assets are preserved.

That’s where he gets the notice?

Thomas B. Donovan:

Yes Mr. Justice White.

Byron R. White:

Now then in on a voluntary petition on a voluntary petition there’s usually an adjudication that day, isn’t it?

Thomas B. Donovan:

Yes Your Honor.

Byron R. White:

And the trustee is usually appointed that day?

Thomas B. Donovan:

Not necessarily.

In this case, the trustee —

Byron R. White:

Why didn’t — I just said usually.

How about in your court (Inaudible)?

Thomas B. Donovan:

I can’t speak from personal knowledge Your Honor.

Thomas B. Donovan:

I don’t believe that so.

I believe there is some gap.

In this case the trustee was appointed on October 30th.

The —

Byron R. White:

That’s because you had a receiver.

Thomas B. Donovan:

That — because we had a receiver probably.

And the notice on —

Earl Warren:

What he notices —

Thomas B. Donovan:

— the first meeting —

Earl Warren:

It seems to me that this — the same would happen numerous time throughout the country every year.

There must be some practice in the banking world and then under the bankruptcy laws throughout the country, what has been the experience in this situation?

Thomas B. Donovan:

Well, again Mr. Chief Justice, my personal experience in this area is so limited that I hesitate to tell you because I’m so uncertain of my own background.

Earl Warren:

Yes.

Thomas B. Donovan:

But — I would say that the normal human reaction when one learns that one has asset or one is a fiduciary and one board has assets is to reduce those assets to possession and control.

And that simply what the receiver is doing here.

He is not filing a notice because it’s necessary to establish his right.

He is doing so as a practical matter to eliminate the confusion that’s going to result when he does try to reduce these assets to possession.

Earl Warren:

But what I would like to ask you is this, assume that you are successful in this lawsuit, how would the bank protect itself against these kinds of laws where its acting in good faith, has no knowledge of any kind and is honoring the checks of his deposit, how would it protect itself?

Thomas B. Donovan:

It’s a very difficult question.

Congress has considered this question and its solution has been Section 70d and if it — came up with a different solution.

If it said the bank is entitled to pay until it receives notice of bankruptcy, then you’ve protected banks but on the other hand you’ve left all the creditors unprotected.

You’ve left the receiver unprotected.

Until he can actually find out who has the assets and communicate word notice of the bankruptcy from himself to the person in possession.

Earl Warren:

I wouldn’t think that would follow.

I think the most you could say would be that the trustee in bankruptcy would have a better chance to get the money from the bank that he would for the — from the payee.

But the payee certainly could be held liable if he receive money that he shouldn’t have received under the bankruptcy laws but this way the bank has to pay twice.

Thomas B. Donovan:

But the bank does not pay the same obligation twice.

That’s why this is not a (Inaudible) case a Harris case or a Western — the Pennsylvania Western Union case because the bank — the first time it paid was paying under a mistake of fact.

In fact, it had no right to pay pursuant to the drawer’s order.

It had only the right to pay to the trustee.

Byron R. White:

So you — so your answer to Chief Justice is that — well the — what protects the bank if the bank can get the money from the payee?

Thomas B. Donovan:

Well, this is the cost of banking, yes.

The bank also has a remedy against third parties.

Byron R. White:

Oh, I think if you — I think the bank could have a tough time to get that money back from the payee and take this for the payee, as this is the preference.

Thomas B. Donovan:

But the — it may have Your Honor, but Congress — number one, we’re dealing with the statutory rule here and the legislative history demonstrate very clearly that Congress was concerned with the rights of these two groups of people, innocent third parties dealing after bankruptcy and I’m the first to admit that they are innocent acting in good faith.

But it’s also concerned with the rights of the creditors of the bankrupt who after all who — rights to collect that money is being discharge in many cases.

And it’s protecting their right to a ratable share of the bankrupt’s assets.

Now, when Congress wrote this role, petitioner suggested that you have to imply notice to give — to protect the bank in this situation and he suggest it perhaps constitutionally you have to imply notice.

Well, I would suggest that if you imply notice to Section 70d, you render the Section completely meaningless because the whole crux of the Section is that good parties dealing after bankruptcy with the assets of bankrupt estate are protected only until adjudication or until a receiver takes possession and here we have adjudication before the transfer.

If notice could be implied why then did Congress write in Section 70d (3) which says that in any case when a party has actual notice, its shall always be deemed not to be acting in good faith.

Congress knew — thought about this good faith part, it thought about the lack of notice and it decided notwithstanding that that the policy in favor of preserving intact assets of bankrupt estates at a date which could be manageably administered without a great deal of litigation and discussion and factual examination of when one party receive notice and when another party receive note.

It decided that you have to have a firm cut update except in the limited circumstances where there is a transfer after bankruptcy but before adjudication.

Byron R. White:

I suppose if a — I suppose if you lose this case, anybody inside the bankrupt company with some assets, and with a bank account, could write a check on that bank account to a print.

Thomas B. Donovan:

It would contribute —

Byron R. White:

And the print could get it in (Inaudible) and if the bank isn’t liable, nobody is?

Thomas B. Donovan:

If we lose this case Your Honor, we would be — the trustee generally would be subject to a new area of fraud that now is precluded.

This was — we got in here to the Massey decision which we cite in our brief, a decision of this Court in 1904 which does not deal with an issue before this Court.

But after that decision was rendered, James McLaughlin who wrote the Chandler Act in the same article in the Chicago Law Review which I have referred to in my brief, some, they criticized that decision because of this very factor that it contributes to fraud.

It leaves open an area —

Byron R. White:

I don’t see it will stop the fraud.

Thomas B. Donovan:

Because its —

Byron R. White:

It won’t stop the fraud but it — all it means is that the — instead of the bankruptcy estate taking the loss, the bank will take it.

And so —

Thomas B. Donovan:

No, it means instead of having a firm cutoff date, instead of having an established date to which the trustee and courts can refer.

You have a flexible date that depends partly on the facts given to the receiver of the trustee by third parties partly on his ability to communicate if in this interim period there is an opportunity for disposition of the assets does not exist if you have a firm rule that no transfers after bankruptcy are valid.

Potter Stewart:

Mr. Donovan in this case all these checks were drawn on the bank and delivered to the payee prior to the date of bankruptcy, weren’t they?

Thomas B. Donovan:

Yes Your Honor.

Potter Stewart:

I think there is or could validly be any distinction between this kind of a case and the case where checks were fraudulently drawn and delivered after bankruptcy because after bankruptcy the bankrupt himself wouldn’t have or any of its officers, if corporation wouldn’t have any power to draw checks, only the trustee would have, isn’t that right?

Thomas B. Donovan:

Well, in part of this Mr. Justice Stewart and part of it does not.

For the checks were drawn and delivered to the payee prior to the bankruptcy.

Potter Stewart:

Yes.

Thomas B. Donovan:

But as far as we know the checks were worthless at that time and the only thing that made them worth the paper they are written on was the fact that after bankruptcy the bankrupt collected accounts receivable and deposited the proceeds in his bank account.

Potter Stewart:

But I didn’t — I missed that in the record.

William J. Brennan, Jr.:

So yes because many of these checks were outstanding for weeks weren’t they before they were presented?

Thomas B. Donovan:

Yes Mr. Justice Brennan.

William J. Brennan, Jr.:

Your point is they probably gave them asset that they hold it, and I will cover it, when I collect on some of —

Thomas B. Donovan:

Well, we don’t know, but this is a possibility.

Potter Stewart:

But your rule would be the same.

The rule for which you’re can tend would be the same even if those facts weren’t in this case, wouldn’t it?

Thomas B. Donovan:

Yes Your Honor except also in this respect, to get into the question of fraudulent conveyances and here we’re not concern with the good faith or lack of good faith or the fraudulent intent of the party against liability is asserted but we’re simple concerned with the fact that here where assets of a bankrupt estate which were transferred after bankruptcy and under Section 70, the language is crystal clear that no transfer after the date of bankruptcy shall be valid against the trustee.

Byron R. White:

Well, I thought that the transfer was the honoring of the checks by the bank.

Thomas B. Donovan:

That’s the particular transfer where —

Potter Stewart:

Rather than the transfer divided by the bankrupt estate to the bank of the fund.

Thomas B. Donovan:

But that also is such a transfer in this case, it — it’s not an issue now before this Court.

Potter Stewart:

That’s not the transfer that’s an issue here, is it?

Thomas B. Donovan:

No.

Potter Stewart:

The one here is the honoring of the checks by the bank which had no knowledge of the bankruptcy.

Thomas B. Donovan:

Yes Your Honor.

Earl Warren:

But Mr. Donovan, as I understand you, this transaction could not be considered a preference because it happened after the adjudication, is that right?

Thomas B. Donovan:

Yes, it would not be considered a preference because it did —

Earl Warren:

Yes.

Thomas B. Donovan:

But as far as the third party is concern, it might or might not be a preference in this case as a matter of fact we’ll conceive (Voice Overlap) —

Earl Warren:

Well, I would just — I just — what I want to ask you, is this, you are saying what a terrible thing it would be if you lost this lawsuit.

Now, I wonder whether there would be any difference in the trustee’s position as concerns this in relation to the payee than if it had been a preference?

You have to sue the payee don’t you if it was a preference to get it —

Thomas B. Donovan:

Well,

Earl Warren:

— back?

Thomas B. Donovan:

If it was a preference though, a whole different set of rules are involved.

All preferences are automatically invalid, you have to show that at the time the —

Earl Warren:

I know but you have to pursue — you have to pursue the payee the one whom you alleged got the preference, do you not?

Thomas B. Donovan:

Yes Mr. Chief Justice.

Earl Warren:

Why would you be in any worst position here if you had to pursue the payee who got the benefit of this money —

Thomas B. Donovan:

Well because —

Earl Warren:

— rather than the bank who paid it out in due course?

Thomas B. Donovan:

Because Mr. Chief Justice that the one thing we may not have been able to find the payee.

If we found him, he may have disposed of the assets.

Earl Warren:

Yes.

Thomas B. Donovan:

He might not have been accountable.

Earl Warren:

Well, I — that’s what I was asking you a little while ago.

You just want a sure source of payment than — that you would get from the payee?

Thomas B. Donovan:

We — certainly, we want banks to be accountable on this circumstances.

But more than that, we want a — we want to execute Congress’ intent that the date of cleavage in bankruptcy is the date of the filing of the petition.

Earl Warren:

Yes, I understand that.

Thomas B. Donovan:

And that if any exemptions from that rule are going to be granted then they ought to be granted by Congress.

In this case Congress has expressly recognized this precise problem and it has established by law a statute which says that parties dealing in good faith after bankruptcy are protected only until adjudication or only until the receiver takes possession.

And if I may answer Mr. Justice Stewart’s —

Hugo L. Black:

Can I ask you a question, you say, — you keep saying Congress had this precise problem.

What number of Congress do you think or what number of the Senate was informed that the passage of this law hold a bank liable, but before they’re notified of a bankruptcy being a check off in due course of business?

Thomas B. Donovan:

All I can —

Hugo L. Black:

Do you think any Congress or Senator would has voted for a bill like this?

Thomas B. Donovan:

Professor McLaughlin in his Chicago Law Review Article and in his testimony before the House Subcommittee points out that Mr. Chandler, the namesake of the Bill was skilled in bankruptcy and had contributed immeasurably to the enactment of this legislation.

But I don’t think he meant and I am not sure it is not so —

Hugo L. Black:

Did he say (Voice Overlap) — about a bank in this situation?

Thomas B. Donovan:

Excuse me Your Honor?

Hugo L. Black:

Was there anything said about a bank in the situation like we have today to the Congress?

Thomas B. Donovan:

The only testimony, as a matter of fact, the Representative of the National Bankers Association, I believed his name was Mr. Styris (ph) testified just prior to Mr. Justice Douglas who testified at great length on the Corporate Reorganization Provisions of the Chandler Act.

Mr. Justice — Mr. Styris only comment and it was very brief, said that he was pleased that the drafters of the Chandler Act had established and preserved the banker’s right of set off in bankruptcy.

Hugo L. Black:

Would that — but he did —

Thomas B. Donovan:

There has nothing whatsoever with the —

Hugo L. Black:

He did dedicate but he knew they were gong to hold him liable like this.

Thomas B. Donovan:

But there were a — there was literally scores of cases involved in —

Hugo L. Black:

I’m not talking about cases.

You’re talking about legislative history in Congress..

What did Congress have to notify them if they would be liable and the situation of a bank would be liable in this situation?

Thomas B. Donovan:

It had — it didn’t have any specific answer to that question.

It did have — Professor McLaughlin’s testimony which explored the historical background which induced the drafters to insert Section 70d in the Bankruptcy Act.

Earl Warren:

Thank you Mr. Donovan.

Mr. Washburn —

Edgar B. Washburn:

Mr. Chief Justice —

Earl Warren:

— you have a few moments left.

Edgar B. Washburn:

I think from the questions asked by the court to Mr. Donovan, the court fully understands the position of the bank.

And unless there are any further questions, I submit it as far as we’re concerned.