In re Hub Carpet Co.

282 F. 12 | 2d Cir. | 1922

MAYER, Circuit Judge

(after stating the facts as above). There is nothing in this record to warrent even a suggestion of fraud. The ioan by Ratner and the assignment by Hub Company of the accounts receivable constituted a legitimate and businesslike transaction, whereby a considerate father was willing to help his son and the latter’s associates in maintaining what, at the time, seemed to be a hopeful business. The questions involved, therefore, are solely questions of law. We shall speak of the receiver as a trustee in bankruptcy, and as though the application of Ratner had been made after the appointment of a trustee, in view of our recent decision in Matter of Max Mitchell (C. C. A.) 278 Fed. 707, filed January 18, 1922.

The status and powers of a trustee under section 47a of the Bankruptcy Act, as that section now reads since the amendments of' 1910 (Comp. St. § 9631), were decisively dealt with in Bailey v. Baker Ice Machine Co., 239 U. S. 268, 275, 276, 36 Sup. Ct. 50, 60 L. Ed. 275. In that case, Baker Ice Machine Company had made an agreement with Grant Bros, for the conditional sale of a machine, the title remaining in Baker Company until the purchase price was fully paid and the machine being in the possession of Grant Bros. Under the recording law of Kansas (Gen. St. 1915, § 6508), a contract of conditional sale is valid between the parties, whether filed for record or not, but is void as against a creditor of the vendee, who fastens a lien upon the property by execution, attachment, or like legal process before the contract is filed for record. The contract was made October 14, 1911, and filed for record May 15, 1912.

On June 11, 1912, Grant Bros, filed their voluntary petition in bankruptcy, and on the following day were adjudged bankrupts. At that time the chattel which was the subject-matter of the controversy was found in the possession of the bankrupts. Between October 14, 1911, and May 15, 1912, no creditor had “fastened a lien upon the property by execution, attachment or other legal process.” It was contended that section 47a, cl. 2, of the Bankruptcy Act, as amended in 1910 (36 Stat. 838, 840, c. 412 [Comp. St. § 9631]), gave a trustee the status of a creditor having such a lien. The court held, however, “that the trustee takes the status of such a creditor as of the time when the petition in bankruptcy is filed.” See, also, In re Morris, 204 Fed. 770, 123 C. C. A. 220; Matter of P. Jesse Matton (C. C. A.) 279 Fed. 530, decided January 18, 1922.

[1] On September 26, 1921, the date of filing of the bankruptcy petition, in the case at bar, there were no receivables upon which any creditor had “fastened a lien.” On September 23, 1921, when the September list was delivered to Ratner, pursuant to the agreement of May 23, 1921, that act was equivalent to the taking of possession in the case of a chattel or to the recording of a mortgage under a state statute. There was nothing further nor better which could have been done by the parties to perfect Ratner’s lien, or to reduce to possession what the parties had called the “collateral security.”

There was no way by which Hub Company could physically deliver notes, checks, or other evidences of debt from customers which had not yet heen received, and the only practicable method of conferring title and possession was by the delivery of the list in compliance with the demand of September 17, as contemplated by the agreement of May 23. Indeed, on this branch, the case is well within Union Trust Co. v. Bulkley, 150 Fed. 510, 80 C. C. A. 328; Gregory v. Morris, 96 U. S. 619, 24 L. Ed. 740; McCaffrey v. Woodin, 65 N. Y. 459, 463, 22 Am. Rep. 644. In Wilds v. Board of Education, 227 N. Y. 211, 125 N. E. 89, the court, in distinguishing that case from Titusville Iron Co. v. City of New York, 207 N. Y. 203, 100 N. E. 806, stated that the “all-important difference between the two cases is, however, the time of possession.”

In view, therefore, of the fact that Ratner had title to the accounts receivable and possession thereof, as matter of law, prior to the filing of the bankx-uptcy petition, the sole remaining question is whether the agreement between Ratner and Hub Company was inherently void, because Hub Company was permitted to reserve the right to use the proceeds of these x-eceivables until and unless Ratner demanded that they should be turned over to him.

[2, 3] It is “to be borne constantly in mind that the state law determines the efficiency of acts and transactions to effect the transfer of title of the property involved.” Remington on Bankruptcy (2d Ed.) vol. 2, §§ 1140, 1275; Sexton v. Kessler, 225 U. S. 90, 32 Sup. Ct. 657, 56 L. Ed. 995; In re Doran, 154 Fed. 467, 83 C. C. A. 265. In New York, accounts receivable are not “goods or chattels” (Lien Law [Con-sol. Laws, c. 33] § 230; Personal Property Law [Consol. Laws, c. 41] § 36 [repealed by Laws 1911, c. 571, § 2]; Niles v. Mathusa, 162 N. Y. 546, 57 N. E. 184), and therefore do not come within the provisions of recording or filing acts.

[4] There has grown up, however, the doctrine of reputed or ostensible ownership. This doctrine seems to have had its origin in Twyne’s Case, 3 Coke Rep. 80b, referred to in Robinson v. Elliott, 22 Wall. 513, 22 L- Ed. 758, and in section 176 et seq. of Mr. Gerrard Glenn’s thoughtful work on “The Rights and Remedies of Creditors respecting their Debtor’s Property.” The doctrine is thus stated by Mr. Glenn in section 173 of his book:

“The situation with which we will now deal is where a man, not the owner of the property, is held out as the owner under such circumstances as would be reasonably calculated to induce the extension of credit to him upon the faith of his apparent ownership. In such a case, when he becomes insolvent, the qxxestion is whether the true owner can assert his title to the property in question as against the persons who have become creditors of the apparent owner.”

In Robinson v. Elliott, supra, a mortgage was executed which provided that the mortgagors—

“may x-emain in possession of said goods, wares, and merchandise, and may sell the same as heretofore and supply their places with other goods, and the goods substituted by purchase for those sold shall, upon being put into said store or any other store in said city where the same may be put for sale by said parties of the first part, he subjected to the lien of this mortgage.”

The Supreme Court said:

“Manifestly it was executed to enable the mortgagors to continue their business, and appear to the world as the absolute owners of the goods, and enjoy all the advantages resulting therefrom. It is idle to say that a resort to the record would have shown the existence of the mortgage, for men get credit by what they apparently own and possess, and this ownership and possession had existed without interruption for 10 years. There was nothing to put creditors on their guard. On the contrary, this long-continued possession and apparent ownership were well calculated to create confidence and disarm suspicion.”

See, also, Frelinghuysen v. Nugent (C. C.) 36 Fed. 229; Griswold v. Sheldon, 4 N. Y. 581, 590; Stackhouse v. Holden, 66 App. Div. 423 at page 427, 73 N. Y. Supp. 203.

But the cases to which this doctrine of reputed or ostensible ownership has been applied are those where the personal property is visible. The American doctrine of reputed ownership, does not, however, apply to choses in action. As Glenn puts the point:

“It may be said that no one can be in the apparent ownership of a chose in action, because there is no possibility of an effective ostentation of ownership by means of possession.”

It is, perhaps, going too far to say that men get credit only because of what they apparently own, or that they never get credit because of the ownership of choses in action which may not be physically seen. This distinction has developed historically, but a further reason for the exclusion of choses in action from the rule of reputed ownership is that courts in their decisions have been reflective of the course of business in the commercial world.

[5] It is matter of common knowledge that the merchant utilizes his accounts receivable and other kinds of choses in action to keep his business liquid, and every one expects that he may sell or pledge such choses in action for that very purpose. On the other hand, it is ordinarily assumed that the goods and chattels in his place of business belong to him and may freely be dealt with by him. It is mainly because of commercial usages and necessities that the courts have not included accounts receivable- within the doctrine of ostensible ownership, but, on the contrary, have excluded them therefrom. Stackhouse v. Holden, 66 App. Div. 423, 73 N. Y. Supp. 203.

The case at bar does not turn upon any question as to the right of substituting security for that withdrawn, which was one of the questions in Sexton v. Kessler, 225 U. S. 90, 32 Sup. Ct. 657, 56 L. Ed. 995, nor on the question as to whether a later transaction was merely the consummation of an earlier agreement, as in Chapman v. Hunt, 254 Fed. 768, 166 C. C. A. 214. Underlying these cases, as well as Greey v. Dockendorff, 231 U. S. 513, 34 Sup. Ct. 166, 58 L. Ed. 339, is this principle of exclusion from the reputed ownership rule, which we apply to this case. As Mr. Justice Holmes points out in Greey v. Dockendorff, supra:

“The rule of the English statutes as to reputed ownership may extend to debts growing due to the bankrupt in the course of his business but we hove no such statute.”

Nor on the facts in the case at bar was there (again to quote from Mr. Justice Holmes) “a moment when the goods [here the receivable sj could have been attached.” The case nearest that at bar is Stackhor se v. Holden, supra, and, although the court was not unanimous, we think the opinion of Nash, J., ably stated the principles here applicable.

[6, 7] From the foregoing, it follows that the receiver (or trustee if since appointed) must account and pay over to Ratner any and all proceeds representing collections by the receiver or trustee of the debts set forth on the list of September 23, 1921, and pn all prior lists up to an amount sufficient to pay the balance beyond $11,581.78 with appropriate interest. The decree below properly provided that the bankrupt or its trustee execute a “formal assignment” to Aaron Ratner of the accounts not yet collected. We are not informed as to whether there were any accounts due Hub Company not mentioned on these lists or arising between September 23d and September 26th. If there were such, Ratner is not entitled to the same, because he took no steps to perfect his. lien in respect thereof, or to reduce such collateral security to possession.

The decree is affirmed, with costs.

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