Sexton v. Kessler & Co.

• Decision Date: 14 May 1909
• Docket Number: 263.
• Citation: 172 F. 535
• Parties: SEXTON v. KESSLER & CO., Limited, et al.
• Court: U.S. Court of Appeals — Second Circuit

172 F. 535

SEXTON v. KESSLER & CO., Limited, et al.

No. 263.

United States Court of Appeals, Second Circuit.

May 14, 1909

Appeal from the District Court of the United States for the Southern District of New York.

See also, 165 F. 508.

McLaughlin Russell, Coe & Sprague (Abram I. Elkus, Frederick C McLaughlin, and Rufus W. Sprague, Jr., of counsel), for appellants.

John Larkin and J. Frankenheimer, for appellee.

Before LACOMBE, WARD, and NOYES, Circuit Judges.

WARD Circuit Judge.

Kessler & Co., of New York, engaged in the business of banking and foreign exchange, had for a long time drawn upon Kessler &amp Co., Ltd., of Manchester, without giving any security for payment of its drafts.

Early in 1903 the Manchester house wrote the New York house as follows:

'We beg to refer to the question of your providing security for the drawing credit which you have with us, which has already been privately touched upon. We understand from Mr. Edward Kessler that it would not be very convenient for you to provide this immediately, and as we in no way wish to incommode you, although from the altered circumstances of this firm it is a matter of some importance to us, we propose to give you until the 30th of June of this year, by which date the necessary securities should be set aside for us and a list sent to us. We do not propose to name a fixed amount of credit. Suffice it to say that what you are at present using seems large, and rather than an increase we should like to see it somewhat reduced.

'We trust that you may be able to give effect to our wishes even sooner than the date we stipulate for.'

In accordance with this letter the New York house, on June 30th, wrote the Manchester house:

'In accordance with instructions from Mr. Alfred Kessler, we have to-day placed in a separate package in our safe deposit vaults the following securities, package marked 'Escrow for account of Kessler & Co., Limited, Manchester':

1,484 shares Oklahoma Gas & Electric Co., at 25 ....	$ 37,100
2,428 shares United Lighting & Heating Co., at 12 ....	29,136
2,352 shares Daimler Manufacturing Co., at 50 .......	117,600
$373,000 United Breweries Co. first 6's, at 65 ......	242,245
	--------
	$406,081

'This escrow is intended as a protection against our long drawings against your good selves.'

July 8th the Manchester house replied as follows:

'We are in receipt of your favor of 30th ultimo, in which you advise us of the securities you have laid aside as security for your long drawings on us. We have noted the particulars as given up to us and the matter goes in order. If at any time you have the opportunity of realizing these securities or any part of them, you are at liberty to take them and to replace them by others of equal value, though in that case we should of course like to see rather better quality.'

December 23, 1903, the Manchester house wrote to the New York house as follows:

'For the purpose of the audit of our books for our yearly balance sheet, we should feel obliged if you would send us, in the form of a certificate, the particulars of the securities you have set aside against your drawing credit with us. We should like this done annually on the 31st December. We do not think the matter will present any difficulty for you. Something in the form of the inclosed is what we require. * * * We certify that we have specially set aside and hold for your acct. on this, the 31st day of December, '03, as security for the drawing credit which you accord us, the following securities: * * * Name secs. and market value.'

The New York house not only conformed to these directions, but, in addition, entered the securities so set aside and all substitutions of them on their loan book and notified the Manchester house of substitutions made from time to time. The securities were always either negotiable by delivery or indorsed in blank. The two houses did business in strict conformity with the foregoing arrangement until the fall of 1907, when a financial panic occurred in the city of New York. October 25th the stability of the New York house being in doubt, it delivered to an agent of the Manchester house then in New York City the escrow securities, which he deposited in a safe deposit company in the name of the Manchester house.

November 8th a petition in bankruptcy was filed against the New York house, and November 27th it was adjudicated a bankrupt.

This is an action in equity brought by the trustee in bankruptcy to set aside the transfer of the securities because made within four months prior to the filing of the petition; the New York house being insolvent, and the Manchester house knowing, or having reason to know, that fact, and the intention being to give it a preference. The matter was referred to a master, who found in accordance with the prayer of the bill, and his report was confirmed by the district judge, from whose decree this appeal is taken.

The master and the district judge both held the transaction in question to be a pledge or an agreement to pledge the escrow securities, and that the delivery of them under the circumstances stated in the bill within four months of the filing of the petition in bankruptcy constituted a voidable preference under the bankrupt act. It may be admitted that the conclusion so reached was entirely right if the arrangement is to be regarded as a pledge or a promise to pledge; possession being essential to the existence of a pledge. This relieves us from the necessity of examining authorities relating to pledges. A word, however, may be said as to the cases of Casey v. Cavaroc, 96 U.S. 467, 24 L.Ed. 779, Casey v. National Bank, 96 U.S. 492, 24 L.Ed. 789, and Casey v. Schuchardt, 96 U.S. 494, 24 L.Ed. 790, upon which the appellant especially relies. In the second case a receipt was given by the bank which might have been treated as a declaration of trust; but the defendant relied on its rights as a pledgee. What Mr. Justice Bradley said in the last case was undoubtedly true of all the cases:

'As the only claim made by Schuchardt & Sons in their answer to the securities in question is by way of pledge, and as there was no such delivery and retention of possession by them or their agents or trustees as the law requires to constitute the privilege of a pledge as to third persons, their claim cannot be sustained.'

The intention to secure is plain; but this could have been accomplished not only by a pledge, which is the usual course of business in case of choses in action, but by a mortgage or by a trust. It can hardly be doubted that a formally executed declaration of trust as to specific securities by the New York house in favor of the Manchester house would have been good. The New York house, although the maker of the trust, could have properly acted as the trustee (Locke v. Trust Co., 140 N.Y. 135, 35 N.E. 578), to the extent of the trust, vix., the protection of the Manchester house for its acceptances.

As the transaction was a perfectly honest one, a construction should be adopted to give it effect, if that is possible. In their correspondence the parties used neither the words 'mortgage,' nor 'pledge,' nor 'trust,' but the inapt word 'escrow,' which they probably did not understand. What they did, however, clearly evidences their intention. The credit to be given to the New York house was not to depend alone upon its strength, but also upon additional security to be given to the Manchester house. The New York house, being the absolute owner of certain specified securities, agreed, in accordance with the requirement of the Manchester house, to hold them for its account, and to that end both segregated them from their other securities and entered them upon their books as so appropriated.

The Manchester house as the equitable owners authorized the New York house to withdraw the specified securities from time to time for their own purposes not absolutely, but upon condition that they should substitute securities of equal value, which was always done. There were, accordingly, during the whole period of this credit, specified earmarked or traceable securities held by the New York house for account of the Manchester house. The use of the word 'collateral' does not necessarily indicate a pledge. It is important only as showing that the Manchester house's ownership of or interest in the securities was only for the purpose of protecting it for accepting the drafts of the New York house.

Considering the family relation and the long business dealing between the two houses, and the fact that they were dealing 3,000 miles apart, and that they had entire confidence in each other, the arrangement made was natural and reasonable. It was sufficiently precise to protect the Manchester house and elastic enough to meet the ordinary requirements of the business of the New York house.

If the transaction had been a mortgage of the securities, the delivery of them October 25, 1907, would have been good as against the trustee in bankruptcy because under the law of the state of New York mortgages of choses in action need not be filed. Lien Law (Laws 1897, p. 536, c. 418) Sec. 90; Humphrey v. Tatman, 198 U.S. 91, 25 Sup.Ct. 567, 49 L.Ed. 956. Doubtless a court of equity would not intervene to enforce or perfect an imperfect mortgage as against the other creditors of the mortgagor; but no such assistance would have been needed, the mortgagor having voluntarily carried out the purpose of the mortgage by delivering the securities to the mortgagee. This would have been legal, notwithstanding the insolvency of the mortgagor and the knowledge of that fact by the mortgagee. Hauselt v. Harrison, 105 U.S. 401, 26 L.Ed. 1075; Wood v. U.S....