May v. Henderson

Background

A business that went bankrupt gave a general assignment for the benefit of creditors to two men, Henderson and Scannell, on September 15, 1920. Henderson was also president of the Fort Sutter National Bank, where the assignor held a deposit account. The account was put in the names of the two assignees as “trustees,” and money was deposited to that account while they ran the business. A bankruptcy petition was filed on October 9, 1920, and a trustee later asked the court to force the assignees to account for and pay over money received from the date of the assignment until a receiver was appointed. Some withdrawals were applied to the bankrupt’s $15,000 note at the bank, including a $4,516.43 debit on September 30 and later debits through October 25 totaling $12,883.81.

Reasoning

The central question was whether the trustee could recover money that the assignees had placed in the bank and which the bank applied to its own claim. The Court explained that when people hold property for a bankrupt’s estate, the bankruptcy court can order a quick accounting and payment to the trustee. A filing of the bankruptcy petition warns the world and protects the estate. The Court found that Henderson, acting both for the assignees and as the bank’s president, directed the debits and that Scannell consented by failing to object. The transfers were held to be collusive and without a colorable legal claim, so the assignees must answer and restore the value of the diverted funds.

Real world impact

The ruling makes clear that people appointed to manage a debtor’s assets must account for and return estate assets they divert, even if a bank applied those funds to a debt. Co-trustees who allow improper transfers are liable, and a bank cannot shield collusive transactions from a bankruptcy trustee’s summary claim.