Gins v. Mauser Plumbing Supply Co.

• Decision Date: 17 April 1945
• Docket Number: No. 277.,277.
• Parties: GINS v. MAUSER PLUMBING SUPPLY CO., Inc., et al.
• Court: U.S. Court of Appeals — Second Circuit

148 F.2d 974 (1945)

GINS v. MAUSER PLUMBING SUPPLY CO., Inc., et al.

No. 277.

Circuit Court of Appeals, Second Circuit.

April 17, 1945.

Montrose H. Massler, of New York City (Krause, Hirsch, Levin & Heilpern and Elliot L. Krause, all of New York City, on the brief), for plaintiff-appellant.

Daniel Levy, of New York City (Milton Goldberger, of Newark, N. J., on the brief), for defendants-appellees.

Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

Plaintiff, as trustee in bankruptcy of Realty Renovating Corporation, has appealed herein from the dismissal on the merits of his complaint to recover property claimed to belong to the bankrupt estate and for other relief. Plaintiff relies upon Bankruptcy Act, §§ 60, 67, 70, 11 U.S.C.A. §§ 96, 107, 110, and upon state law to support his contention that the property in question, pledged by the bankrupt originally to Harnat Holding Corporation, and later without further change of possession to defendant Mauser Plumbing Supply Co., Inc., belonged to the estate, while this defendant claims the property by virtue of a transfer from Harnat to it after the pledgor's bankruptcy and an alleged sale by it foreclosing the pledges.¹ The case involves interesting and important legal questions as to the possession required for a valid pledge in New York when the property is already in the possession of a prior pledgee and as to the sale of pledged property after the pledgor's bankruptcy.

January 18, 1938, the bankrupt agreed to renovate premises known as 667 Madison Avenue, New York City; and payment of the contract price was thereafter made by the promissory notes of the owner, 667 Madison Avenue, Inc., maturing in 1939, 1940, and 1941, secured by an assignment of rents running to the bankrupt. June 22, 1938, the bankrupt owed $25,000 to Harnat Holding Corporation for loans and a bonus or discount therefor, and pursuant to a written agreement pledged with Harnat, as collateral security for this debt, the contract with 667 Madison Avenue, Inc., and all the notes and security received from it, as well as certain other promissory notes likewise secured by other assignments of rents. On October 6, 1938, the bankrupt made an agreement of pledge to defendant covering such of the Madison notes as would mature from September 1, 1939, to December 1, 1940, together with the assignments of rents of the premises,² all to secure a total obligation of $25,750, which included both direct loans from and bonus to defendant and also the sum $18,257.30 originally owed one Lanoil and by him assigned to defendant. This security was still in the possession of Harnat and was therefore pledged as expressly subject to the Harnat debt of $25,000. At the same time the bankrupt instructed Harnat by letter to turn over to defendant all of the 1939 and 1940 Madison notes upon repayment of the $25,000 and to return to the bankrupt the 1941 notes. And Harnat through its counsel acknowledged and accepted the bankrupt's instructions by a letter of the same date to defendant. The parties stipulated at trial that the pledgor was solvent at that time.

By March, 1939, however, the pledgor was in financial difficulties; and, an attempted agreement with creditors falling through, involuntary proceedings in bankruptcy were started against it on May 1, 1939, at which time, as the parties now agree, it was insolvent. It was adjudicated a bankrupt on June 15, and plaintiff was elected trustee July 11, 1939. Defendant knew of the petition at once; and since the Harnat note made that a default, defendant, being notified by Harnat of the latter's intention to foreclose, bought Harnat out on May 3, 1939, for the amount still due on that pledge, namely, $7,861.43, and took possession of the collateral. On June 5, 1939, defendant gave written notice to the bankrupt that pursuant to the power of sale "in said principal note and agreement" (obviously a reference to the Harnat pledge, although it had just recited defaults in both pledges), it would sell the securities "at public auction to the highest bidder for cash" at the office of its attorney on June 10. At that sale defendant purchased all the securities in its hands for the amount then owed it by the pledgor, $32,761.43. The face value of the collateral at the time of the pledges appears to have been well in excess of $60,000;³ and at the time of the trial in February, 1943, defendant conceded that it had collected more than enough to satisfy the Harnat claim. Counsel then asserted that the collections already made were less than half defendant's own claim, but the court deferred any question of an exact accounting until the primary question of liability should be settled.

Plaintiff framed his complaint in five separate "causes of action," followed by a demand for judgment in fourteen different paragraphs. He withdrew the fifth cause at trial; and on this appeal the parties have stipulated that no question of law or fact will be raised as to the dismissal of the third and fourth causes. As a matter of fact, all these separate causes were only the statement of the same claim in the light of different legal theories. Such repetitious statement of legal claims, originally required by the exigencies of common-law pleading, is too firmly grounded in our history to be outlawed even though it has often been criticized by code pleaders.⁴ But it has its dangers, as this case shows. A simple statement in sequence of the events which have transpired, coupled with a direct claim by way of demand for judgment of what the plaintiff expects and hopes to recover, is a measure of clarity and safety; and even the demand for judgment loses its restrictive nature when the parties are at issue, for particular legal theories of counsel yield to the court's duty to grant the relief to which the prevailing party is entitled, whether demanded or not. Federal Rules of Civil Procedure, rule 54 (c), 28 U.S.C.A. following section 723c; Ring v. Spina, 2 Cir., 148 F.2d 647; United States, for Use of Susi Contracting Co. v. Zara Contracting Co., 2 Cir., 146 F.2d 606, and cases cited. On the other hand, the extensive pleading of seemingly precise legal theories inevitably tends to suggest that other theories, less well developed, are intentionally excluded.

Here, in fact, the particular legal theories contemplated by each cause are none too clear. Seemingly, however, the first cause is designed to stress a claim of preference and fraudulent transfer under Bankruptcy Act, §§ 60, 67, and state law, because possession of the property was actually taken by defendant after bankruptcy, while the second cause appears to stress invalidity of the sale, particularly because of lack of notice or of permission of the bankruptcy court, under § 70 and state law. On this appeal plaintiff has also strongly urged that at least he is entitled to the Madison notes maturing in 1941 and 1942, as not included in the Mauser pledge; while defendant contests this, as a change in theory not presented to or passed upon by the trial court. But in any event the complaint did set forth both pledge agreements as attached exhibits; and this particular point rests upon a mere reading and comparison of the two documents, which show on their face the more limited content of the second pledge. And plaintiff has attacked the initial validity of the Mauser pledge, as well as the effectiveness of the later sale upon which defendant now relies for title. Hence, however much plaintiff may have overpleaded, we think it clear that he is now entitled to attack the legal validity of the two transactions and to claim the property in full or to the extent or interest to which he may be legally entitled.⁵

Plaintiff's first contention is, therefore, that the October 6, 1938, agreement created merely an equitable pledge, or one incomplete for lack of delivery of possession, which was not perfected until after bankruptcy. Hence plaintiff says that this was a preferential transfer under Bankruptcy Act, § 60, as not so far perfected that no bona fide purchaser or creditor could have acquired further rights from the debtor until defendant's acquisition of possession on May 3, 1939. If plaintiff's premise is correct, its conclusion of a voidable preference is sound enough. Corn Exchange Nat. Bank & Trust Co., Philadelphia, v. Klauder, 318 U.S. 434, 63 S.Ct. 679, 87 L.Ed. 884, 144 A.L.R. 1189; Swetnam v. Edmund Wright Ginsberg Corp., 2 Cir., 128 F.2d 1, certiorari denied Edmund Wright Ginsberg Corp. v. Swetnam, 317 U.S. 647, 63 S.Ct. 42, 87 L.Ed. 521; In re Hutcherson, 7 Cir., 133 F.2d 959. But we agree with the District Court that the pledge was perfected at the time it was made, and hence long before defendant's physical acquisition of the security.

When the debtor made its pledge to defendant on October 6, 1938, the security in question was then out of the pledgor's possession and in the hands of Harnat, who, upon notice of the second pledge, agreed to deliver it to defendant as soon as its own debt was paid. This follows the usual rule that delivery should be all that the situation permits of at the time to remove the property from the ostensible ownership of the pledgor; to require more would in effect prevent a further pledge of property already subject to pledge and would set an arbitrary restriction on a normal commercial practice without due regard for the underlying policy of the legal rules. Delivery to the pledgee is required primarily as notice to the pledgor's creditors and possible purchasers that the property in question is no longer free from prior interests of third parties. Swetnam v. Edmund Wright Ginsberg Corp., supra; 51 Yale L.J. 431, 432; 4 Collier on Bankruptcy, 14th Ed.1942, 1446.⁶ But when the property is no longer in the pledgor's possession, ordinarily no good reason exists for requiring further delivery. And the courts have recognized this in holding or indicating with regard to...