Fourth St. Nat. Bank v. Millbourne Mills Co.'s Trustee

• Decision Date: 10 August 1909
• Docket Number: 1908.,October Term,38
• Citation: 172 F. 177
• Parties: FOURTH ST. NAT. BANK v. MILLBOURNE MILLS CO.'S TRUSTEE. In re MILLBOURNE MILLS CO.
• Court: U.S. Court of Appeals — Third Circuit

172 F. 177

FOURTH ST. NAT. BANK v. MILLBOURNE MILLS CO.'S TRUSTEE.

In re MILLBOURNE MILLS CO.

No. 38, October Term, 1908.

United States Court of Appeals, Third Circuit.

August 10, 1909

Buffington Circuit Judge, dissenting.

Henry S. Drinker, Jr., and H. Gordon McCouch, for petitioner.

John G Johnson, for trustee.

Before GRAY and BUFFINGTON, Circuit Judges, and ARCHBALD, District judge.

ARCHBALD District Judge.

The question involved in this case is the validity, as against the trustee, of certain pledges or attempted pledges of grain and flour on store at the mills of the bankrupt company. The company issued certificates, after the manner of a warehouse of the quantity of these commodities on hand, on the strength of which, as collateral, loans were secured from time to time; the property, however, remaining in the possession and under control of the company, and there being nothing outside of the certificates to indicate the rights of the certificate holders to it. By agreement the property was sold by the trustee and the money brought into court for distribution, where the pledges were held to be invalid for want of possession taken; the money being awarded to the trustee for the benefit of the estate. And thereupon this petition was prosecuted.

By the express provisions of the bankruptcy act, Sec. 70 a, the trustee is vested with the title of the bankrupt by operation of law as of the date of the adjudication to all (5) property which prior to the filing of the petition might have been levied upon and sold under judicial process against him; and is authorized (section 70 e) to 'avoid any transfer by the bankrupt of his property which any creditor of said bankrupt might have avoided. ' It is also provided (section 67a) that 'claims, which for want of record or for other reasons,' would not be 'valid liens as against the claims of creditors of the bankrupt shall not be liens against his estate'; and (b) 'whenever a creditor is prevented from enforcing his rights as against a lien created or attempted to be created by his debtor, who afterwards becomes bankrupt, the trustee of the estate of such bankrupt, shall be subrogated to and may enforce such rights of said creditor for the benefit of the estate.'

It follows as a necessary consequence from these enactments, unless the plain terms of the statute are to be disregarded, that, if creditors in any given case would have the right to call in question the transaction, the trustee as their representative is entitled to do so also. Indeed, unless the rights of creditors are preserved and protected in some such way, bankruptcy, instead of being in their interest, as supposed, is an actual disadvantage, taking from them that which they otherwise would have. Nor is this representation confined to creditors who have liens on the property of the bankrupt, but applies equally to those by simple contract only, whose rights are no different, except that until judgment and execution they are simply not in a position to assert them. Skilton v. Codington, 185 N.Y. 80, 77 N.E. 790, 113 Am.St.Rep. 885. It may be, as said in Thompson v. Fairbanks, 196 U.S. 516, 25 Sup.Ct. 306, 49 L.Ed. 577, that 'the trustee takes the property in cases unaffected by fraud in the same plight and condition that the bankrupt himself held it'; or, as it is put in York Manufacturing Company v. Cassell, 201 U.S. 344, 26 Sup.Ct. 481, 50 L.Ed. 782, that he 'stands simply in the shoes of the bankrupt.' But it is also true, as declared by the same high authority in First National Bank v. Staake, 202 U.S. 141, 26 Sup.Ct. 580, 50 L.Ed. 967, that 'the rule that the trustee takes the estate of the bankrupt in the same plight as the bankrupt held it is not applicable to liens, which, although valid as to the bankrupt, are invalid as to creditors'-- a qualification which it is of the utmost importance to bear in mind here.

There is no analogy to the position of an assignee for the benefit of creditors under the state law, and the decisions relied on with that idea (Vandyke v. Christ, 7 Watts & S. (Pa.) 373; Wright v. Wigton, 84 Pa. 163; and Smith v. Equitable Trust Company, 215 Pa. 418, 64 A. 594) are misleading and do not apply. An assignment is the voluntary act of the debtor, who can confer no authority which he does not himself have, and whose assignee is therefore limited to the same extent that he is; while a trustee in bankruptcy, as we have seen, takes title by operation of law, entirely independent of the bankrupt, and is expressly invested with the rights of creditors, which he is authorized to enforce. The position of a trustee in insolvency, on the other hand, is squarely in point, taking title by operation of law as he also does, and being similarly authorized to avoid the fraudulent acts of the insolvent in the interest of creditors. Tams v. Bullitt, 35 Pa. 308; Ruff v. Ruff, 85 Pa. 333, 336. 'A voluntary assignee for the benefit of creditors,' says Chief Justice Mitchell, in Printing Press Company v. Publishing Company, 213 Pa. 207, 62 A. 841, 'is a mere representative of the debtor and is bound where he will be bound. Wright v. Wigton, 84 Pa. 163. But Tams v. Bullitt establishes the distinction that when the assignee, trustee, or whatever he may be called, derives his authority, not from the mere voluntary act of the assignor, but from the mandate of the law, even when enforced, by the language of that case, through a 'compulsory assignment' from the debtor, in the interest of the creditors, he represents the latter and is vested with their powers.'

It was, accordingly, held, in Bank of Alexandria v. Herbert, 8 Cranch, 36, 3 L.Ed. 479, that the trustee of an insolvent, representing creditors, was entitled to take advantage of a defect in the recording of a mortgage, although the insolvent himself could not. 'In reason,' says Chief Justice Marshall, 'there can be no difference between this statute, which asserts the right of the creditors, in the mode prescribed by law and an assertion of that right in their own names. ' And in line with this, in Moors v. Reading, 167 Mass. 322, 45 N.E. 760, 57 Am.St.Rep. 460, and Drury v. Moors, 171 Mass. 252, 50 N.E. 618, a trustee in insolvency, as the representative of creditors, was allowed to recover personal property which had been inadequately pledged.

The same principle applies also to a receiver, appointed by court, upon a creditor's bill, who derives authority, as it is said, not at all from the debtor, but from the court, acting in the interest of creditors, and for the enforcement of their rights (Printing Press Company v. Publishing Company, 213 Pa. 207, 62 A. 841), a view to which this court is committed by the decision in Porter v. Boyd, 171 F. 305, in which it was enforced in favor of the receiver of an insolvent corporation as against chattels held under a conditional sale. And so does it, to the receiver of a national bank, who, in Casey v. Cavaroc, 96 U.S. 467, 24 L.Ed. 779, was held entitled to maintain a bill to recover securities, which had been agreed to be pledged, but failed of being so, for want of delivery; the authority for this being most significantly drawn by analogy from that of an assignee (now trustee) in bankruptcy, a receiver to wind up a bank being regarded as occupying an equivalent position.

'That an assignee in bankruptcy has this power,' as is there said, 'cannot well be doubted.' And in Security Warehousing Company v. Hand, 206 U.S. 415, 27 Sup.Ct. 720, 51 L.Ed. 1117, a trustee in bankruptcy was allowed to avoid a pledge of personal property, invalid for want of delivery, on the ground that this could have been done by creditors, the very case which we have here.

'By section 70a,' says Mr. Justice Peckham, 'the trustee in bankruptcy is vested by operation of law with the title of the bankrupt to all property transferred by him in fraud of his creditors, and to all property which, prior to the filing of the petition, might have been levied upon and sold by judicial process against him; and by subdivision 'e' of the same section the trustee in bankruptcy may avoid any transfer by the bankrupt of his property, which any creditor of the bankrupt might avoid, and may recover the property so transferred or its value. Here are special provisions placing the title to the property transferred by fraud, or otherwise as mentioned, in the trustee in bankruptcy, and giving him the power to avoid the same.'

And again:

'The title to this property was in the knitting company. There had been no valid pledge of it, because the possession had been at all times in the knitting company, and it could have been levied upon and sold under judicial process against the knitting company at the time of the adjudication in bankruptcy. The security company had, of course, full knowledge that the knitting company in fact at least shared in the possession of the property. It was itself an actor, or it acquiesced in the arrangement under which it had, at most, but a partial possession, and even that was subject to the control of the knitting company.'

Distinguishing the case of York Manufacturing Company v. Cassell and others of like character, preceding it, it is further said:

'The case at bar bears no resemblance in its facts to the cases just cited. There was no valid disposition of the property in the case before us, or any valid lien. The so-called 'warehouse receipts' issued by the warehousing company to the knitting company, upon the facts of this case, gave no lien under the law in Wisconsin, in which state they were issued. In such case this court follows the state court.'

The present case arises out of an attempt, by the bankrupt, a milling company, to pledge its property for money advanced while still retaining...