Foster v. Manufacturers' Finance Co., 2171.

• Decision Date: 19 November 1927
• Docket Number: No. 2171.,2171.
• Parties: FOSTER v. MANUFACTURERS' FINANCE CO.
• Court: U.S. Court of Appeals — First Circuit

22 F.2d 609 (1927)

FOSTER v. MANUFACTURERS' FINANCE CO.

No. 2171.

Circuit Court of Appeals, First Circuit.

November 19, 1927.

Robert A. B. Cook, of Boston, Mass. (Phipps, Durgin & Cook, of Boston, Mass., on the brief), for appellant.

Harrison J. Barrett, of Boston, Mass. (George W. Reed and Friedman, Atherton, King & Turner, all of Boston, Mass., on the brief), for appellee.

Before BINGHAM, JOHNSON, and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge.

The facts of controlling importance in this bankruptcy preference case are within narrow compass.

The bankrupt, Sullivan, assigned to the Finance Company about $60,000 of bills receivable, designated specifically. Of these, about $49,000 were forgeries. In March, 1925, the representative of the Finance Company examined Sullivan's books, discovered the fraud, and procured from Sullivan, by way of partial substitution for the forged accounts, assignments of about $10,000 of valid receivables. It is conceded that the Finance Company then had reasonable cause to believe Sullivan insolvent. Adjudication ensued the next month.

The controversy is over the proceeds of the new and valid receivables thus assigned in March. The referee, whose jurisdiction is conceded, held the transaction a preference. The District Court (Lowell, J.) reversed the referee, saying: "The company lent its money on the faith of the bankrupt's assigning good accounts. When it discovered that the accounts were bad — in fact, had no existence — it required him to do merely what he had agreed to do. His estate has not been depleted by the transfer of the good accounts, because the bankrupt merely did under compulsion what he should have done in the first place; and his estate would not have received the benefit of the money loaned, unless the Manufacturers' Company had trusted him to assign good accounts. * * * The case at bar is similar to those which involve the doctrine of what is known as an `equitable lien.' Sexton v. Kessler, 225 U. S. 90, 32 S. Ct. 657, 56 L. Ed. 995."

We think the referee was right, and the court wrong. Forged accounts are not part of a bankrupt estate; they are nothing. Sullivan's warranty of title of the specifically described and assigned accounts cannot be extended into an equitable lien over undesignated, unassigned (and, for aught that appears, then nonexistent) accounts. The assignments were limited to specifically assigned accounts; they can no more be extended to cover, by way of equitable lien or any other right, undesignated accounts, than a chattel mortgage of furniture not owned can be extended to cover undescribed furniture actually owned. When Sullivan assigned valid receivables in substitution for forged receivables, he depleted his estate to that extent. Prior to the March transfer, what the Finance Company had was forgeries, plus Sullivan's contract or covenant that they were valid. That contract or covenant cannot be related to the assignments in March.

The theory urged, and in effect adopted by the court below, is that, because Sullivan procured money from the Finance Company on forged receivables, an equity then and there arose against all of Sullivan's real assets of the same general nature, although unmentioned either specifically or in...