Lawrence Sexton v. Kessler Company

• Decision Date: 27 May 1912
• Docket Number: No. 92,92
• Citation: 32 S.Ct. 657,225 U.S. 90,56 L.Ed. 995
• Parties: LAWRENCE E. SEXTON, as Trustee in Bankruptcy of Alfred Kessler, Rudolf E. F. Flinsch, and William K. Gillette, Composing the Firm of Kessler & Company, and of the said Kessler & Company, Appt., v. KESSLER & COMPANY, Limited, and Frank Youatt, Liquidator
• Court: U.S. Supreme Court

225 U.S. 90

32 S.Ct. 657

56 L.Ed. 995

LAWRENCE E. SEXTON, as Trustee in Bankruptcy of Alfred Kessler, Rudolf E. F. Flinsch, and William K. Gillette, Composing the Firm of Kessler & Company, and of the said Kessler & Company, Appt.,

v KESSLER & COMPANY, Limited, and Frank Youatt, Liquidator.

No. 92.

Argued December 12 and 13, 1911.

Decided May 27, 1912.

Messrs. John Larkin and Alexander S. Andrews for appellant.

[Argument of Counsel from pages 90-95 intentionally omitted] Messrs. Abram I. Elkus, Frederick C. McLaughlin, and Rufus W. Sprague, Jr., for appellees.

Messrs. Henry Wollman and Kurnal R. Babbitt in support of motion by John Gorlow for leave to intervene.

Mr. Justice Holmes delivered the opinion of the court:

This is a bill brought by a trustee in bankruptcy to set aside an alleged fraudulent preference. The circuit court of appeals reversed a decree of the district court for the plaintiffs, and dismissed the bill. ——L.R.A.(N.S.) ——, 97 C. C. A. 161, 172 Fed. 535. It will be enough for our decision to state the following facts: The appellee was an English company and the bankrupts a New York firm, intimately connected with it, which for many years had drawn upon it. In February, 1903, the English house requested the New York firm to set aside securities for their drawing credit. The New York firm wrote on June 30 that they had that day placed in a separate package in their safe deposit vaults certain securities named, the package being marked, 'Escrow for account of Kessler & Co., Limited, Manchester;' adding, 'This escrow is intended as a protection against our long drawings against your good selves.' This letter was acknowledged, and it was added, 'If at any time you have the opportunity to realizing these securities or any part of them, you are at liberty to take them and to replace them by others of equal value, though in that case we should, of course, like to see rather better quality.' In December of the same year the English house suggested a form of certificate as follows: 'We certify that we have specially set aside and hold for your account, on this, the 31st day of December, '03, as security for the drawing credit which you accord us, the following securities. Name secs. and market value.' This was conformed to and the New York house also entered the securities and all substitutions on their loan book. Substitutions were made from time to time and the English house notified. The securities always were either negotiable by delivery or indorsed in blank. They were marked and kept as stated in the letter upon a separate shelf of the New York firm's vault, and they never were removed except in 1905 and 1906, when they were taken to the office to be examined and checked off by representatives of the English company. Business went on in this way until the panic of 1907. On October 25 of that year, the stability of the New York firm being in doubt, it handed over the escrow securities to an agent of the English company then in New York, and he deposited them in a safe deposit vault in the name of the company. On Nevember 8 a petition of bankruptcy was filed, and on November 27 the New York firm was adjudged bankrupt. Notwithstanding arguments to the contrary, it may be assumed that the arrangement between the parties was made in good faith and intended and believed to be valid, and, on the other hand, that, at the time of the change of custody on October 25, within four months of the petition, the New York firm was insolvent, and that the English company had reasonable cause to believe that a preference was intended if its rights began only on that date.

So far as the interpretation of the transaction is concerned, it seems to us that there is only one fair way to deal with it. The parties were business men, acting without lawyers, and in good faith attempting to create a present security out of specified bonds and stocks. Their conduct should be construed as adopting whatever method consistent with the facts and with the rights reserved is most fitted to accomplish the result. If an express declaration of an equitable lien, or, again, a statement that the New York firm constituted itself the servant of the English company to maintain possession for the latter, or that it held upon certain trusts, or that a mortgage was intended, or any other form of words, would effect what the parties meant, we may assume that it was within the import of what was done, written, and said. So the question is whether anything in the situation of fact or the rights reserved prevents the intended creation of a right in rem, or, at least, one that is to be preferred to the claim of the trustee.

The bankruptcy law by itself does not avoid the transaction. Thompson v. Fairbanks, 196 U. S. 516, 49 L....