Jordan v. Federal Trust Co.

• Decision Date: 21 February 1924
• Docket Number: 1791.
• Citation: 296 F. 738
• Parties: JORDAN v. FEDERAL TRUST CO.
• Court: U.S. District Court — District of Massachusetts

296 F. 738

JORDAN v. FEDERAL TRUST CO.

No. 1791.

United States District Court, D. Massachusetts.

February 21, 1924

Frederick W. McEnery, of Boston, Mass., for plaintiff.

James E. Cotter and Joseph P. Fagan, both of Boston, Mass., for defendant.

LOWELL District Judge.

This was a bill in equity, brought by the trustee in bankruptcy of Frank E. Wing, to set aside a chattel mortgage as a preference or a transfer in fraud of creditors. Wing was the agent in Boston of the Nordyke-Marmon Company for the sale of the Marmon cars, manufactured by it. He got the money necessary to carry on his business by loans on collateral security from the defendant. The Nordyke-Marmon Company sent cars to Boston with the bill of lading made out to the Federal Trust Company, and drew on Wing for the amount of the shipment. Wing took the draft to the Federal Trust Company which accepted it and indorsed the bill of lading to him. He then got the cars from the railroad and took them to his place of business at the corner of Ipswich and Boylston streets in Boston. In order to secure itself for the advances to Wing, the Federal Trust Company took a so-called 'public warehouse receipt.' An attempt was made to establish a public warehouse. Many of the forms of conducting a public warehouse were gone through with. Miss Stearns Wing's cashier, was appointed a public warehouseman, gave bond, and made publication as required by the statute. She received no salary or compensation of any kind for her duties, as warehouseman. A large part of the basement of the bankrupt's premises was set apart as a warehouse. It was barred off by a partition with a gate in it. The gate was kept locked, but the key hung by the side of the gate and was not kept by Miss Stearns. No signs of any kind indicating the presence of a warehouse were displayed on any part of the premises. No fee was charged for storage, and the cars in the warehouse all belonged to Wing. Miss Stearns kept a receipt book in which she entered the numbers of the cars which were placed in the warehouse. The cars were moved about on the premises at will, and had no mark on them to show that the Federal Trust Company claimed any right in them. When Wing wanted to use one of them for demonstration purposes, he delivered up the warehouse receipt and gave a 'trust receipt' in the following form:

'Trust Receipt.

'April 21, 1922.

'Federal Trust Company, Boston, Mass.-- Gentlemen: In consideration of acceptance No. 4524 due 5/8/22 $372913/100 made for my account I hereby agree to hold the following goods in trust for you and as your property, to wit: Marmon Car # 15220126 for demonstrating purposes, with liberty to sell the same for your account, and further agree, in case of sale, to hand the proceeds to you to apply against your acceptances on my account, and for the payment of any other indebtedness of mine to you.

'You may at any time cancel this trust and take possession of said goods or of the proceeds of such of the same as may then have been sold wherever the said goods or proceeds may then be found and in the event of any suspension, or failure, or assignment for the benefit of creditors, on my part, or of the nonfulfillment of any obligations and of the nonpayment at maturity of any acceptances made by you for my account hereunder, all obligations and acceptances whatsoever shall thereupon (with or without notice) mature and become due and payable. These goods while in my hands shall be fully insured against loss by fire and insurance certificates in your favor placed in your possession.

'Frank E. Wing, 'By M. Stearns, Atty.'

It was shown by the evidence that Wing sold the cars by sample showing customers some cars in the salesroom and promising to deliver one like the sample. When a car was sold, delivery would not ordinarily be made without the sanction of the Federal Trust Company, which authorized Wing to take the car from the warehouse.

On May 25, 1922, the cars on which the Federal Trust Company had made loans were all covered by either warehouse receipts or trust receipts. On that day all these receipts were given up, and a chattel mortgage was taken in their stead. The mortgage was duly recorded. It contained, among other covenants, one stating that the mortgagor 'shall not, except with the consent in writing of the grantee or its representatives, attempt to sell or to remove from Suffolk or Middlesex counties the same or any part thereof. ' After this several of the cars were sold by Wing.

Wing had been a borrower at the bank for several years, always furnishing collateral security. His business had grown from a small beginning until it had assumed large proportions. On February 15, 1922, Wing for the first time was given a loan, of $25,000, without security. Mr. O'Neill, the president of the Federal Trust Company, testified that he thought Wing would pull through all right-- that the loan was given at a time when many persons needed assistance on account of the disturbance in business brought about by the war. Wing was in difficulties, and in the early part of June an arrangement was proposed for getting him out of his troubles, but it was not carried out. On August 10 the Federal Trust Company took possession of the cars covered by the mortgage, and on August 12 a petition in bankruptcy was filed against Wing, and the plaintiff was afterwards elected trustee.

The evidence showed that the chattel mortgage was taken because the Federal Reserve Bank would no longer lend money on warehouse receipts. The evidence satisfies me that in May the Federal Trust Company knew that Wing was in difficulties, but that, although early in June it was fully aware of the situation, on May 25, the date of the mortgage, it did not have sufficient knowledge to be aware that the chattel mortgage gave it superior advantages over other creditors.

There are three fundamental questions in this case: First. Was the chattel mortgage an exchange of one good security for another, and therefore valid under the well-known rule? Second. If not, did it constitute a preference? And third. If it was not a preference, was it invalid because under it sales were made just as before, without other notice to creditors than the recording of the mortgage?

The first question may be shortly answered. The warehouse receipts did not give the Federal Trust Company any rights superior to those of the trustee in bankruptcy. Security Warehousing Co. v. Hand, 143 F. 32, 74 C.C.A. 186; Id., 206 U.S. 415, 27 Sup.Ct. 720, 51 L.Ed. 1117, 11 Ann.Cas. 789. See McPherson v. Mass. Trust Co. (D.C.) 291 F. 676, where other authorities are referred to.

The trust receipts raise an interesting question. This was an ingenious attempt to get valid security by the use of a trust receipt for a purpose wholly foreign to its legitimate use. There has been some confusion in the authorities, but the true doctrine has been recently laid down in a very able opinion by Judge A. N. Hand in the Court of Appeals for the Second Circuit in Re Fountain, 282 F. 816, 25 A.L.R 319. See, also, an article by Karl T. Frederick, Esq., of the New York bar on 'The Trust Receipt as Security,' 22 Columbia Law Rev. 395 et seq. The true function of a trust receipt is to enable a banker to finance a loan for the importation of merchandise by a merchant, or the domestic purchase of such merchandise. Credit is given by the banker to the foreign or domestic seller of the merchandise, by means usually of a letter of credit. The bill of lading for the goods is sent to the banker, who then delivers it to the buyer under a trust receipt, for the purpose of getting the merchandise entered at the customs house or placed in a warehouse, or sometimes for the purpose of its sale in bulk, or even of its being manufactured into salable articles. In every case the banker retains title as security for his loan, and the buyer is given possession of the bill of lading...