Interstate Banking & Trust Co. v. Brown

• Decision Date: 20 July 1916
• Docket Number: 2717,2885,,2886.,2718
• Citation: 235 F. 32
• Parties: INTERSTATE BANKING & TRUST CO. v. BROWN et al. In re LESSER-ELY COTTON CO.
• Court: U.S. Court of Appeals — Sixth Circuit

235 F. 32

INTERSTATE BANKING & TRUST CO. v. BROWN et al.

In re LESSER-ELY COTTON CO.

Nos. 2717, 2718, 2885,, 2886.

United States Court of Appeals, Sixth Circuit.

July 20, 1916

For some years prior to April, 1913, a business as cotton factors had been carried on, at Memphis, by the Lesser-Ely Company, a partnership, of which Lesser was the active head. On the 25th day of April, Lesser disappeared. It was at once evident that the company was insolvent, and an involuntary petition in bankruptcy was filed on April 26th. This was duly followed by adjudication; and these controversies arise between adverse claimants in the administration of the bankrupt estate.

As the business was regularly carried on, the Lesser-Ely Company received (e.g.,) a consignment of 10 bales of cotton. The consignor might be the grower or the grower's vendee. Each bale bore a tag which, by gin marks and otherwise identified this bale from all others and enabled it to be traced back to the grower and the ginner. The Lesser-Ely Company paid the freight and similar expenses, perhaps made or had already made advances to the consignor on account of the selling price, and deposited the bales in a certain Memphis warehouse. Eventually, the cotton was sold and the selling price, less charges and expenses, commissions and advancements, remitted by the Lesser-Ely Company to the consignor. Sometimes the Lesser-Ely Company itself, by sufficient advances or by outright purchase, became the owner of cotton and thereafter sold to others. The warehouseman did not issue to the Lesser-Ely Company warehouse receipts from day to day as the cotton was received and stored, but issued such receipts from time to time as requested by the Lesser-Ely Company, each receipt covering 100 bales, or some convenient number. These receipts did not identify the bales of cotton to which they referred, but each one was in the form shown by the specimen given in the margin. ^[1] The Lesser-Ely Company used these receipts as collateral in borrowing money from banks and individuals in Memphis and the tributary cotton country, borrowing, usually if not always $50 against each bale supposed to be represented by the receipt. When the bankruptcy came, it appeared that there were in the warehouse about 2,000 bales deposited by the Lesser-Ely Company, and that there were outstanding as collateral in the possession of these banks and individual lenders warehouse receipts for about 5,000 bales. This situation resulted from the fraud of Lesser, and the negligence of the warehouseman. All parties exonerate the latter from intentional fraud, but he issued receipts as requested by Lesser without insisting upon the deposit of additional bales or the cancellation of old receipts in equivalent amount, and he trusted Lesser not to ask for receipts which were not against cotton on hand. The bankrupts were also largely indebted to general creditors.

Under the direction of the court, the entire 2,000 bales were sold by the bankruptcy trustee, and the sale proceeds of each bale or lot separately entered. Many intervening petitions were filed by cotton claimants, but it was determined that the cotton should be sold and all existing claims and liens transferred from the cotton to the proceeds. The cotton so sold was divisible into two classes: First, that in which the total of the Lesser-Ely Company's expenses, charges, and advances was less than the selling price. As to this cotton, it was evident-- as between the consignor and the Lesser-Ely Company--that title had remained in the consignor, subject to the Lesser-Ely Company's lien or interest for the amount due it. The second class included those bales which had been purchased by the Lesser-Ely Company or as to which its charges and advancements were greater than the sale price. As to these, it was evident that the Lesser-Ely Company's resulting interest, legal or equitable, covered the entire title to and interest in the cotton.

The intervening petitions were by consignors and by receipt holding pledgees. The consignors demanded their respective bales of cotton, subject to such charges and advances as existed. Each holder of a warehouse receipt as collateral security demanded the number of bales called for by his receipt. The bankruptcy trustee answered and claimed title superior to the consignors and the receipt holders. The receipt holders denied the right of the consignors, and the consignors denied the right of the receipt holders; and many subordinate controversies also arose as to special rights or defenses alleged by or against individual claimants. It is sufficient for present purposes to say that the referee held that the claims of the consignors were valid against both trustee and receipt holders; that as to the remainder of the property, after that identified by the consignors was withdrawn, and including the surplus value over the consignor's interest in cotton partly paid for, the receipt holders were tenants in common, among whom the fund should be distributed proportionately; and that the bankruptcy trustee took nothing. These conclusions were confirmed by the district judge, excepting that he disallowed entirely, because usurious, the claim of the largest receipt holder. This receipt holder, the Interstate Banking & Trust Company, brings appeal No. 2717, the bankruptcy trustee brings appeal No. 2718, and other receipt holders bring appeals Nos. 2885 and 2886.

G. T. Fitzhugh and I. W. Crabtree, both of Memphis, Tenn., for trustee.

T. E. Cooper and St. John Waddell, both of Memphis, Tenn., for certain petitioners and consignees.

W. H. Fitzhugh, of Memphis, Tenn., for Commercial Trust & Savings Bank and others.

W. P. Armstrong, of Memphis, Tenn., for W. A. Gage & Co. and others.

J. L. McRee, of Memphis, Tenn., for State Sav. Bank.

Luke E. Wright, of Memphis, Tenn., and J. W. Cutrer, of Clarksdale, Miss., for Interstate Banking & Trust Co.

Caruthers Ewing, of Memphis, Tenn., for C. D. Smith.

Before KNAPPEN and DENISON, Circuit Judges, and SESSIONS, District Judge.

DENISON Circuit Judge (after stating the facts as above).

By virtue of the amendment of June, 1910, to section 47a (2) of the Bankruptcy Act, this trustee represents creditors not secured by receipts ceipts with the same force and effect as if these unsecured creditors had, on April 26th, levied executions upon the cotton in the warehouse.

This property came into the custody of the bankruptcy court, and titles or liens which, under the law of Tennessee, would have prevailed against such levying creditors are superior to the title of the trustee; all others must yield to that title. Bailey v. Baker Co., 239 U.S. 268, 275, 36 Sup.Ct. 50, 60 L.Ed. 275; In re Farmers' Co. (D.C.) 202 F. 1005; s.c.(D.C.) 202 F. 1008; In re Williamsburg Co. (D.C.) 190 F. 871, reversed, but on other grounds, in Holt v. Henley, 232 U.S. 637, 34 Sup.Ct. 459, 58 L.Ed. 767; In re Bazemore (D.C.) 189 F. 236; In re Floyd-Scott Co. (D.C.) 224 F. 987, 989.

The rights of the receipt holders, as against the trustee, must depend upon the so-called Uniform Warehousing Act, existing in Tennessee as chapter 336 of 1909. This act, as is obvious by its title ^[2], was intended to cover the subject of the respective rights of holders of warehouse receipts and creditors of the depositors, and it has superseded all existing common or statutory law on this subject. Commercial Bank v. Canal Bank, 239 U.S. 520, 529, 36 Sup.Ct. 194, 60 L.Ed. 417.

All parties assume it to be the law of Tennessee, as is the general rule, that a pledge, not followed by delivery, actual or symbolical, is invalid against execution levying creditors of the pledgor. It is even held that the levying officer takes a title to the property. See Herman v. Katz, 101 Tenn. 118, 126, 47 S.W. 86, 41 L.R.A. 700. No actual delivery is here claimed and there is symbolical delivery, if at all, only by virtue of these warehouse receipts, resting upon this statute. ^[3] If they are such negotiable receipts as the statute contemplates, it follows by the very words of sections 25 and 41 ^[4] that those who have, in good faith, taken them from a factor as security for present loans, take a title superior to that of consignor or of the factor's levying creditors. Commercial Bank v. Canal Bank, supra. If they are not such negotiable receipts, the title and rights of the consignor and levying creditor remain untouched thereby. So, we come directly to the controlling question: 'Are these the negotiable receipts contemplated by the act, and, particularly, by sections 25 and 41?

In so far as concerns the present question, this statute is one to be construed strictly rather than with any great liberality. Prior thereto, factors had a right to pledge to the extent of their interest, but no further. The statute gives them the right effectively to pledge the consignor's interest, which did not belong to them, and so far as it thereby permits them to destroy an otherwise existing legal interest, it surely calls for strict construction. As to property owned by the warehouse depositor but subject to secret liens, this statute in some jurisdictions created and in others recognized the power of the depositor to pledge his warehouse receipt so as to give a better title than he had and so as to destroy those rights which under the policy of the state would otherwise accrue to the execution creditor; and this, too, calls for strict construction.

Following its plan of either creating, or recognizing and then regulating, a class of instruments having defined attributes and results, section 2 defines those receipts concerning which the act speaks, and to which, by sections 25 and 41, it gives peculiar force. Sections 2, 4, and 5 are quoted in the margin. ^[5] Section...