In re Pacat Finance Corporation

• Decision Date: 22 May 1923
• Citation: 295 F. 394
• Parties: In re PACAT FINANCE CORPORATION.
• Court: U.S. District Court — Southern District of New York

295 F. 394

In re PACAT FINANCE CORPORATION.

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

May 22, 1923

The report of Joseph M. Proskauer, Special Master, here follows:

By order made on the 15th of March, 1921, it was directed that all reclaiming creditors of the bankrupt file their claims and that the determination of all their right, title, and interest be referred to me as special master. I was additionally directed to adjust, determine, and adjudicate 'the rights, titles, interests, equities, claims, and liens of the parties, and report my determination. ' I took the oath as special master, which is annexed to my report. Pursuant to this order 28 claimants filed petitions 13 of these claimants withdrew their petitions, and the petitions of 15 claimants are before me for report. Several of these involve a number of distinct claims.

The primary business of the bankrupt was dealing in foreign exchange. The hearings have been protracted and difficult, by reason of the complicated questions of law and fact arising from a variety of foreign exchange transactions. A most helpful attitude was taken throughout by counsel for the trustee. While defending the rights of the trustee with great skill, he has nevertheless facilitated his adversaries and the special master by supplying, frequently in lucid summary form, a large volume of evidence relating to exchanges of correspondence, the state of various bank accounts, and the basis of many separate transactions. Much labor was thereby imposed upon him, and by the assumption of this responsibility he assisted in the development of a record which presents the issues clearly.

As the claim of the National Shawmut Bank of Boston involves the most important of the fundamental questions to be determined this claim will be first considered.

The Claim of the National Shawmut Bank of Boston.

On December 20, 1920, the National Shawmut Bank of Boston (which, for convenience, will hereafter be designated as Shawmut) made an agreement with the bankrupt, by which, in consideration of the payment of $58,627.50 to the bankrupt in New York on December 22, 1920, the bankrupt engaged to pay 1,000,000 francs in Paris on December 22, 1920. A similar transaction was entered into on December 20, 1920, for the payment by Shawmut of $118,890 in New York, and payment by the bankrupt abroad of 3,500,000 lire on December 23, 1920 and additional transactions were entered into on December 22 and 23, 1920, by which Shawmut engaged to pay to the bankrupt in New York $185,952.50, and the bankrupt engaged to pay abroad 13,500,000 marks on December 28, 1920. Shawmut lived up to its engagements, and paid $58,627.50 on December 22 $118,890 on December 23, and $185,952.50 on December 28, 1920. These sums were all deposited in the account of the bankrupt with the National Park Bank of New York.

All question of tracing and marshaling I shall reserve for a later section of this report. I shall here consider the question whether Shawmut is entitled to reclaim such portion of its payments as may be traced and properly marshaled to it. The exact legal nature of the business transactions described must be first determined. They were all founded upon written memoranda, identical in character, save for change of date, amount, and foreign currency. For purpose of illustration, I quote Shawmut's Exhibits X14 to X16.

The bankrupt sent to Shawmut the two papers, Exhibits X14 and X15, which Shawmut confirmed by Exhibit X16.

Exhibit X14.

'New York, December 20, 1920.

'Pacat Finance Corporation, 42 Broadway,

'Foreign Exchange Division.

Frank Bailey, Assistant Treasurer.'

'Messrs. National Shawmut Bank of Boston, Boston, Mass.-- Gentlemen: This is to confirm that we have sold you to-day, through Ernst Rosenfeld, Fcs. 1,000,000. Cable Paris at 5.86 1/4 for delivery December 22, 1920. Kindly confirm and greatly oblige.

'Very truly yours,

Exhibit X15.

'New York, December 20, 1920.

'National Shawmut Bank of Boston, Boston, Mass.

'Ref. No. PFC 1239.

'To Pacat Finance Corporation, Dr., 42 Broadway, New York:

For cable transfer Paris-- Fcs. 1,000,000, at 5.86 1/4 . . . $58,625.00

Cost of cable . . . 2.50

Amount due . . . $58,627.50

'Payable here and abroad on December 22, 1920.

'To Guaranty Trust Company, Paris, France, Through Comptoir National d'Escompte de Paris, France.

'The Pacat Finance Corporation or its correspondents, in effecting this transfer or payment of funds either by cable or telegraph, assumes no liability, and it is agreed is not responsible, for any loss or delay in transmitting the message, or for any cause beyond its control.'

Exhibit X16.

'The National Shawmut Bank of Boston, Foreign Department.

'Boston, Mass., Dec. 21, 1920.

'Pacat Finance Corp., 42 Broadway, N.Y.-- Gentlemen: We beg to confirm having bought of you through E. Rosenfeld cable transfer payable December 22d for Fcs. 1,000,000 at 5.86 1/4, which please pay for our account to Guaranty Trust Co. of N.Y., Paris. Proceeds will be paid to you through First National Bank, N.Y.

'Yours very truly,

The National Shawmut Bank of Boston,

'W. J. Hartney, Assistant Mgr.'

In interpreting the legal effect of these documents, I look to their essence, and discard any extreme inference to be drawn from the mere conventional, though legally inexact, use of a word. St. Regis Paper Co. v. Hubbs, 235 N.Y. 30, 138 N.E. 495. Thus I agree with the argument of the trustee that the transaction is not in legal effect a sale. Equitable Trust Co. v. Keene, 232 N.Y. 290, 133 N.E. 894, 19 A.L.R. 1137.

I agree, also, with his contention that the transaction did not operate as an assignment of any funds Moreover, I think it clear that the money paid by Shawmut did not in the first instance constitute a trust res, in the sense that the particular money paid to the bankrupt was to be transmuted into the foreign currency. In sustaining the right of reclamation, I am mindful of the decision of the Circuit Court of Appeals of this Circuit in Re Bolognesi & Co., 254 F. 770, 166 C.C.A. 216, and of the Court of Appeals in Legniti v. Mechanics & Metals Nat. Bank, 230 N.Y. 415, 130 N.E. 597, 16 A.L.R. 185, both of which denied the character of a trust res to payments made in a certain form of foreign exchange transaction. The right of reclamation here rests on different grounds, which distinguish this case entirely from the authorities cited. In both those cases the unsuccessful claimants went to the banker, paid money, and either actually received a draft in exchange or rested content with the engagement of the banker to transmit in the future foreign credit by cable or by draft. As to draft purchasers Judge Hough writes in the Bolognesi Case, 254 F. 770, at page 772, 166 C.C.A. 216, at page 218: 'But those claimants who came to the bankrupt to buy drafts and the like, and got what they bargained for, cannot claim against the fund, for their bargains were completed.'

This represents one class of foreign exchange transaction. A second class is represented by the transaction in the Legniti Case, where the customer paid his money to the bank, and the bank agreed to transmit the foreign exchange at some reasonable time in the future. There the engagement is unconditioned, and the so-called purchaser is relying upon the credit and solvency of the so-called seller.

But in the instant case the transaction took a third and very different form. Here the parties contracted in advance of the day of performance that on a specified day in the immediate future (the interval, according to the testimony of the expert witness Rosenfeld, being merely sufficient for cable transmission), each party would perform; that on the specified day the so-called buyer would pay here, and on the very same day the so-called seller would pay abroad.

The understanding of this transaction by those engaged in the business is thus clearly stated by the witness Rosenfeld: 'A spot transaction is a transaction which is made for immediate delivery, payable here and there on the same day. ' By immediate delivery the witness meant, not the same day, but the lapse of sufficient time to permit the transmission of the cable. The witness continues: 'That always necessitated the sending off of the actual cable on the date on which the transaction was consummated, until the due date, by which I mean the date of the actual transfer of money simultaneously in both places.'

This seems to me to state, in the language of an experienced business man, what must be held to be the legal effect of these memoranda. The letter of confirmation written by Pacat (Exhibit X14) must be read with the bill or invoice (Exhibit X15), dated the same day. The force of the phrase in Exhibit X15, 'Payable here and abroad on December 22, 1920,' is controlling.

If there had been an intent that Shawmut should rely on the unconditioned engagement of Pacat, it is extremely unlikely that the invoice, dated the same day with the confirmation, would have postponed the dollar payment to the same date upon which the franc payment was to be made, and this improbability is transformed into substantial certainty of an opposite intent by the express use of the phrase that the dollars and francs were both to be paid on the specified future day. Confirmation is also given to this view by the form of the Shawmut letter, which states that the 'proceeds' will be paid to Pacat on the postponed date, though I do not regard this phrasing as essential to the maintenance of the view here expressed.

In legal effect, the intent of the parties here was to make an executory bilateral contract that on a certain day each would perform concurrently with the other's performance. In this aspect it was exactly like an...