In re Klein

• Decision Date: 03 November 1924
• Docket Number: No. 18.,18.
• Citation: 3 F.2d 375
• Parties: In re KLEIN. KAPLAN et al. v. CLARK.
• Court: U.S. Court of Appeals — Second Circuit

3 F.2d 375 (1924)

In re KLEIN KAPLAN et al. v. CLARK.

No. 18.

Circuit Court of Appeals, Second Circuit.

November 3, 1924.

I. Gainsburg, of New York City (Harold R. Medina, Joseph Segal, and Leander I. Shelley, all of New York City, of counsel), for petitioners.

Isaac Steinhaus, of New York City, for respondent.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

MANTON, Circuit Judge.

Walter Klein, a dealer in suits and cloaks, was adjudged a bankrupt on an involuntary petition filed November 12, 1921. The petitioners were wholesale dealers of cloaks and suits, and delivered certain garments to the bankrupt pursuant to an agreement entered into on August 31, 1921. The petitioners assert these goods were delivered on consignment, whereas the trustee declares that there was a sale of the goods, and that the petitioners must share their loss with the other creditors. About August 31, 1921, the bankrupt called at the petitioners' place of business and stated that he desired to purchase cloaks and suits. Their sales manager refused to sell, but suggested that the petitioners might be willing to let him have them on consignment, and that this could only be done after the credit department of the firm approved. After some negotiations an agreement was entered into whereby it was provided that the petitioners would deliver "on memorandum or consignment" such goods as might be thereafter agreed upon. It reserved the right to demand the return of the merchandise consigned upon Monday of any week, and, in case the bankrupt failed to return it, the petitioners had the option to accept in lieu thereof payment at the rate specified in the invoices which accompanied the goods. Title to the goods was to remain in the petitioners until they exercised their option to accept payment and charge the goods to the bankrupt. The bankrupt agreed to keep a separate consignment or memorandum book of the merchandise, and a separate record of the consigned merchandise disposed of, and a separate account of the moneys received from the consigned merchandise to which the petitioners should have access at any time. It provided that the moneys received by the bankrupt upon the disposal of any of the consigned merchandise was to be held in trust for the petitioners, and to be turned over to them on Monday of each week. In the event of the failure of the bankrupt to turn over to the petitioners either the consigned merchandise or the identical proceeds thereof he was adjudged to be guilty of conversion. The bankrupt agreed to carry insurance upon the consigned merchandise. The invoices accompanying the goods delivered pursuant to the agreement were to indicate that the goods were delivered on consignment only.

The special master reported that certain cloaks and suits were delivered pursuant to this agreement, but denied the right of the petitioners to reclaim the goods for the reason that he held this was a collusive agreement between the parties made and carried out with the exclusive idea of protecting the petitioners in case of bankruptcy so that they would receive an unfair advantage to the detriment of the other creditors. The district judge confirmed this result, holding that to rule otherwise would enable the petitioners to obtain a preference over other creditors of the bankrupt.

We think the agreement of August 31, 1921, created a mere bailment, and title to the goods remained in the petitioners. Unless the agreement was made in bad faith for the purpose of defrauding other creditors, the petitioners should succeed in their present application. The effect of similar agreements when entered into in good faith have been upheld. Ludvigh v. American Woolen Co., 231 U. S. 522, 34 S. Ct. 161, 58 L. Ed. 345; In re Cattus, 183 F. 733, 106 C. C. A. 171. A trustee in bankruptcy does not stand in the position of an innocent purchaser, but must take the bankrupt's property "as the debtor had it at the time of the petition, subject to all valid claims, liens and equities." Zartman v. First Nat. Bank, 216 U. S. 134, 30 S. Ct. 368, 54 L. Ed. 418; Matter of Wright-Dana Hardware Co. (D. C.) 207 F. 636.

The agreement at bar shows an intention that title should remain in the petitioners. The provision requiring the return of the goods upon Monday of any week or, in lieu thereof, of money which was optional with the petitioners, required that, if money was paid, it would be the invoice price. It was agreed that title should remain in petitioners until the option of the petitioners to accept cash was exercised. Records were to be kept showing the account between the parties which were to be available on Monday of every week. It thus appears that a bailment of the merchandise was provided for with the option in the petitioners to convert it into an actual sale on each Monday. Guss v. Nelson, 200 U. S. 302, 26 S. Ct. 260, 50 L. Ed. 489; Sturm v. Boker, 150 U. S. 312, 14 S. Ct. 99, 37 L. Ed. 1093; In re Schindler (D. C.) 158 F. 458. The fact that the agreement failed to provide that the petitioners should set the price at which the bankrupt should dispose of the goods does not change the character of the bailment. Where a bailment exists for the purpose of permitting the bailee to dispose of the very property, the fact that the bailor permits the bailee to retain for his compensation whatever he might obtain over and above the agreed price does not destroy the existence of the bailment. This permitted the bankrupt to fix the selling price and retain the difference between the invoice price to be paid on the accounting and the selling price as compensation for his insurance, commissions or other expenses. It does not constitute a contract or agreement of sale. In re Columbus Buggy Co., 143 F. 859, 74 C. C. A. 611. As was stated by this court in Taylor v. Fram, 252 F. 465, 164 C. C. A. 389, if the agreement was made in good faith, and if the business was carried on in accordance with it, there is no doubt that such bailment is lawful and may not be attacked in the event of bankruptcy. There we said:

"There are numerous cases which may be cited to show that such an agreement creates a bailment, and not a sale, and that the bailor is at liberty at any time to retake his merchandise, irrespective of whether bankruptcy proceedings intervene or whether the debtor is solvent or not. All this we concede, and no citation of authorities is necessary.

"But the above doctrine only applies where the agreement is entered into in good faith, and without intent to hinder, delay, or defraud creditors."

Taking the agreement in question at its face value, it clearly created a bailment of the goods sought to be reclaimed, and under its terms the trustee could take no title to the goods for the benefit of other creditors. As above quoted, however, the question is presented as to the good faith and whether the parties executed it with the intention of carrying out its provisions or merely as a cloak covering a transaction which was, in point of fact, a sale. The petitioner seeks to recover 117 garments, 38 of which have not been identified as being in possession of the trustee. As to the other 89, ...