Hotchkiss v. National City Bank of New York

• Decision Date: 30 December 1911
• Citation: 200 F. 287
• Parties: HOTCHKISS v. NATIONAL CITY BANK OF NEW YORK.
• Court: U.S. District Court — Southern District of New York

200 F. 287

HOTCHKISS v. NATIONAL CITY BANK OF NEW YORK.

United States District Court, S.D. New York.

December 30, 1911

Pursuant to the custom of stockbrokers in New York, securities are deliverable on the day following their sale. The transactions are of such magnitude that it would not be possible to conduct the business with the capital of the broker, who is obliged to obtain temporary credit to pay for securities deliverable to him, while he is receiving the proceeds of the securities which he is delivering to his purchasers. He is also required to carry large accounts of securities on margin for customers, to do which he obtains ordinary demand loans covered by securities, which are constantly changing by reason of sale or otherwise, so that, in addition to a temporary loan to make clearances, the broker must have accommodation to enable him to shift his collateral and receive securities, which are included in his ordinary demand loans. The clearance loans are loans for the day, which extend an accommodation credit in the morning for the specific purpose of enabling the broker to pay for securities delivered and to be returned from the proceeds of the same securities when delivered to his customer; it being understood that no portion of the proceeds of such loans should be used for any other purpose whatever to clear securities. No interest is charged on these loans, they being solely for the temporary accommodation of the depositor while he is meeting his engagements for the day. Though the loans are nominally made payable on demand, they are paid during the day as a matter of course without demand; the broker beginning to make deposits begins to make deliveries, and that was the course of dealing between the bankrupts and the bank, which had been carried on daily for many years.

At the opening of business on January 19, 1910, the bankrupts were solvent and obtained a clearance loan from defendant bank of $500,000, evidenced by two demand notes, providing that the bank should have a lien on all property of the bankrupts then or thereafter in its possession or under its control, with the right at any time to demand additional security. Against such credit the bankrupts drew four checks to pay off outstanding secured loans to certain banks and trust companies, which checks were certified by the bank, and on payment of the loans the securities deposited as collateral therefor were delivered to the bankrupts. This clearance loan had been paid off in the usual course of business during the forenoon of the day it was made, with the exception of about $117,000, when the suspension of the bankrupts was announced on the Stock Exchange at about noon, resulting from a violent break in the stock market affecting all securities but chiefly the stock of the Columbus & Hocking Coal & Iron Company, in which the bankrupts were largely interested, and in which a pool existed. At about noon defendant's vice president and assistant cashier, who had charge of making clearance loans, went to the office of defendant and asked for payment, or for securities to make good the clearance loan made that day, and after waiting an hour or two, during which the bankrupts conferred with their counsel, received securities not later than 2:30 p.m. When the bank received the securities, it knew that the bankrupts had suspended on the Stock Exchange, but did not know that it was insolvent. Substantially all the securities thus received were paid for or liberated from loans by the use of the proceeds of the clearance loan during the morning.

The special master found that when the securities were delivered the firm was insolvent, and that the representatives of the bank had reasonable cause to believe that it was intended to give defendant a preference whereby it would obtain a greater percentage of its debt than other creditors of the same class, and advised a decree for complainant, to which defendant objected.

R. P Lewis, of Pittsburgh, Pa., for complainant.

John A. Garver, of New York City, for defendant.

HAND District Judge.

I do not think it necessary to add anything to the referee's report, except upon two questions: First, the need of proving that the defendant knew that the bankrupts intended a preference; second, the defense of an equitable lien.

Upon the first point Alexander v. Redmond, 180 F. 92, 103 C.C.A. 446, is conclusive. It is idle to say that the opinion is obiter. I tried the case below, and, being of different opinion, decided it expressly, because the element of an intent to prefer was lacking. The reversal was therefore expressly upon that point, and the case settles the law in this circuit.

The second point is without doubt difficult, and requires careful analysis into the difference of intention between an obligation and a property right, which closely approach each other under these circumstances. I shall assume two things, which are at least not conceded. First, I assume that the written contracts may be varied by proof of a custom; second, that the custom would be valid, if it existed and actually gave a lien upon the assets. What, then, is the defendant's position? It is this: Under the custom of banks and brokers, first, the certified checks, when withdrawn from the bank, remain in equity still the bank's property, call the right a trust or whatever you will; second, the broker may use them only to relieve securities, either pledged or purchased, from liens upon them for money lent, or for purchase price due; third, the securities, when the broker receives them, are subject to an equitable lien equal in amount to the bank's advances upon them, and that lien remains, not only upon them, but upon any money or other property which the broker may get by pledging or by selling them, so that if the broker, having sold the released securities, reinvests the moneys, the lien would remain upon the new securities so purchased. In other words, the actual intention of the parties here effects, the defendant says, what the law would itself impose, if the funds were at any time in the hands of the broker affected with an equitable lien or an implied or constructive trust. Now, this is a perfectly intelligible position, whether or not it be a sound one, and I must concede to the defendant that it does not seem to me to be an answer merely to show that the broker is free to pledge or sell the securities pledged with the bank's money, because if the custom contemplated his doing so, and also contemplated that the proceeds of such a sale or pledge should themselves be subject to the same lien, then it would not be an objection to show that the broker could in fact sell the securities.

On the other hand, all that actually takes place is consistent with the absence of any lien whatever, and with merely a restriction upon the use of the checks to the release of securities, and a strict requirement that the loan be paid at the close of the day. Nothing which the brokers do indicates that they regard the property in their hands as subjected to any lien, because it is not enough that they are restricted in the use of the funds. For example, A. may lend B. money only on condition that B. put it in his business. A. would have no lien. Even if B. were to promise A. to pay him out of the funds in his business, A. would have no lien. Dillon v. Barnard, 21 Wall. 430, 22 L.Ed. 673; Franklin v. Browning, 117 F. 226, 54 C.C.A. 258; Barrington v. Evans, 3 Y. and C. 384. Justice Clifford says in Dillon v. Barnard, on page 439 of 21 Wall. (22 L.Ed. 673), that there must be--

'some act of appropriation on the part of the employer' (the promisor) 'depriving himself of the control of the funds and conferring upon the contractor' (the promisee) 'the right to have them applied to his payment when the services are rendered or the materials are furnished. There must be a relinquishment by the employer of his right of dominion over the funds, so that without his aid or consent the contractor can enforce their application to his payment...