Ernst v. Mechanics' & Metals Nat. Bank of City of New York

• Decision Date: 09 December 1912
• Docket Number: 55-- 127.
• Citation: 201 F. 664
• Parties: ERNST et al. v. MECHANICS' & METALS NAT. BANK OF CITY OF NEW YORK. HOTCHKISS v. NATIONAL CITY BANK OF NEW YORK.
• Court: U.S. Court of Appeals — Second Circuit

201 F. 664

ERNST et al. v. MECHANICS' & METALS NAT. BANK OF CITY OF NEW YORK.

HOTCHKISS v. NATIONAL CITY BANK OF NEW YORK.

No. 55-- 127.

United States Court of Appeals, Second Circuit.

December 9, 1912

[Copyrighted Material Omitted]

Joline Larkin & Rathbone, of New York City (L. H. Freedman, Adrian H. Larkin, and Leland B. Garretson, all of New York City, of counsel), for appellant Mechanics' & Metals Nat. Bank.

Shearman & Sterling and John A. Garver, all of New York City, for appellant National City Bank.

William A. Barber, of New York City (Abram I. Elkus, of New York City, of counsel), for appellant Hotchkiss.

Hays Hershfield & Wolf, of New York City (Daniel P. Hays and Edwin D. Hays, both of New York City, of counsel), for appellees.

As to the Ernst Case:

Before LACOMBE, COXE, and WARD, Circuit Judges.

As to the Hotchkiss Case:

Before LACOMBE, WARD, and NOYES, Circuit Judges.

WARD Circuit Judge.

These cases are alike in respect to the main question involved, which is said to be of great importance to the business of stockbrokers in New York City and may be disposed of together as to it. Certain features in which they differ will be considered separately.

January 19, 1910, between 12 and 1 o'clock, the stockbroking firms of J. M. Fiske & Co. and Lathrop, Haskins & Co. failed, as the result of the collapse of a pool or pools in the stock of the Columbus & Hocking Valley Coal & Iron Company.

At the beginning of banking hours on that day Fiske & Co. had arranged for a day or clearance loan of $400,000 from the Mechanics, now the Mechanics' & Metals National Bank, and Lathrop, Haskins & Co. had arranged for one of $500,000 from the National City Bank. The banks, becoming uneasy about the financial condition of the brokers as the day progressed, demanded security for their accounts and obtained from each a large quantity of collaterals. Between 12 and 1 o'clock the firms notified the Stock Exchange that they were unable to meet their engagements, and subsequently each was adjudicated a bankrupt. The trustee of each estate brought a plenary action in equity for recovery of the securities or their value as a preference voidable by him under section 60 of the Bankruptcy Act and also in the case of Fiske & Co. for some $54,000 in cash deposited by them on the morning of the 19th in their account with the bank. The proceedings were referred to a special master, who took testimony and reported that each transaction was a voidable preference and directed the banks to account for the securities and cash to the trustees in bankruptcy of the failed firms. This report was confirmed by the District Court, and the banks have taken the appeals which are now to be disposed of.

Fiske & Co. had been dealing with the Mechanics' National Bank since November 8, 1901, under the following written contract:

'Know all men by these presents that the undersigned, in consideration of financial accommodations given, or to be given, or continued to the undersigned by the Mechanics' National Bank of the City of New York, hereby agree with the said bank that whenever the undersigned shall become or remain directly or contingently, indebted to the said bank for money lent, or for money paid for the use or account of the undersigned, or for any overdraft or upon any indorsement, draft, guaranty, or in any other matter whatsoever, or upon any other claim, the said bank shall then and thereafter have the following rights, in addition to those created by the circumstances from which such indebtedness may arise against the undersigned, or his, or their executors, administrators or assigns, namely:

'(1) All securities deposited by the undersigned with said bank, as collateral to any such loan or indebtedness of the undersigned to said bank shall also be held by said bank as security for any other liability of the undersigned to said bank, whether then existing or thereafter contracted; and said bank shall also have a lien upon any balance of the deposit account of the undersigned with said bank existing from time to time, and upon all property of the undersigned of every description left with said bank for safe-keeping or otherwise, or coming to the hands of said bank in any way, as security for any liability of the undersigned to said bank now existing or hereafter contracted.

'(2) Said bank shall at all times have the right to require from the undersigned that there shall be lodged with said bank as security for all existing liabilities of the undersigned to said bank, approved collateral securities to an amount satisfactory to said bank; and upon the failure of the undersigned at all times to keep a margin of securities with said bank for such liabilities of the undersigned satisfactory to said bank, or upon any failure in business or making of an insolvent assignment by the undersigned, then and in either event all liabilities of the undersigned to said bank shall at the option of said bank become immediately due and payable, notwithstanding any credit or time allowed to the undersigned by any instrument evidencing any of the said liabilities.

'(3) Upon failure of the undersigned either to pay any indebtedness to said bank when becoming or made due, or to keep up the margin of collateral securities above provided for, then and in either event said bank may immediately without advertisement, and without notice to the undersigned, sell any of the securities held by it as against any or all of the liabilities of the undersigned, at private sale or broker's board or otherwise and apply the proceeds of such sale as far as needed toward the payment of any or all such liabilities together with interest and expenses of sale, holding the undersigned responsible for any deficiency remaining unpaid after such application. If any such sale be at broker's board or at public auction, said bank may itself be a purchaser at such sale free from any right or equity of redemption of the undersigned, such right and equity being hereby expressly waived and released. Upon default as aforesaid, said bank may also apply toward the payment of the said liabilities all balances of any deposit account of the undersigned with said bank then existing.

'It is further agreed that these presents constitute a continuing agreement, applying to any and all future as well as to existing transactions between the undersigned and said bank.'

On January 19th they applied for a day loan (which was granted), as follows:

'New York, January 19, 1910. 'Mechanics' National Bank, New York City:

'Please loan us to-day $400,000. Crediting this amount to our account, and oblige,

J. M. Fiske & Company'

On the same day Lathrop, Haskins & Co. applied to the National City Bank for a day loan of $500,000 and signed two notes differing only in amount, in the following form:

'$300,000.

New York City, January 19, 1910.

'On demand for value received we promise to pay to the National City Bank of New York, or order, three hundred thousand ($300,000) dollars, hereby agreeing that said bank shall have a lien upon all property of the undersigned now or hereafter in its possession or under its control, as security for any indebtedness of the undersigned now existing or hereafter contracted, with the right at any time to demand additional security, and with the right, upon default in payment, to sell, without advertisement or notice to the undersigned, any or all of the securities or property so held, at public expense or private sale, or to otherwise dispose of the same in the discretion of any of the officers of said bank, applying the proceeds upon the said indebtedness together with interest and expenses, legal or otherwise, the undersigned to be liable for any deficiency.

'Lathrop, Haskins & Co.'

The proofs show that in New York City contracts of brokers to deliver stock sold and to pay for stocks purchased must be carried out the next day and that credit from banks is absolutely necessary to enable them to release the...