In re Milne

185 F. 244 | 2d Cir. | 1910

COXE, Circuit Judge.

This is a proceeding in the matter of Milne, Turnbull & Co., bankrupts. Kessler & Co. are also bankrupts and Lawrence E. Sexton is their trustee. In January, 1908, Sexton, as trustee, filed a proof of debt against the estate of Milne, Turnbull & Co. for $131,388.99 and in March, 1908, the Merchants’ National Bank filed its claim against the estate for $25,000. The debts in controversy are based upon notes of Milne, Turnbull & Co., of which Kessler & Co. held $36,000, the Merchants’ Bank $25,000 and Kessler & Co., Ltd., $40,000. These notes were all made to the order of Kessler & Co. and were by them delivered to the bank and Kessler & Co., Ltd. As collateral to these notes Milne, Turnbull & Co. had assigned to Kessler & Co. accounts receivable upon which $16,951 has been collected. Each party claims this sum as collateral to its debt. On the 1st of May, 1905, Milne, Turnbull & Co., merchants, and Kessler & Co., bankers, entered into a written agreement by which the bankers agreed to undertake the payment for goods shipped to the merchants by European manufacturers at maturity and to guarantee all sales in connection with orders having the bankers’ approval. It was further agreed that all accounts for goods sold should be transferred to the bankers and the bills of lading and invoicés should be plainly stamped as follows: “This account has been assigned and is only payable to Kessler & Co., bankers, 54.Wall St., New York.” In accordance with this agreement, thus partially stated, business was transacted until the time of the failure. When goods were sold the merchants sent copies of the invoices to the bankers and when the account was paid to them the merchants were given credit therefor.

On the 10th of May, 1906, Kessler & Co. borrowed $150,000 from the Merchants’ Bank and gave a demand note therefor with collaterals and in October, 1907, the firm borrowed $65,000 more, giving similar notes therefor. By the terms of these notes the bank was given a lien for their payment “upon all properties or securities which have been or which shall hereafter be given to or left in the possession or custody of the bank by. or for the undersigned for safe keeping, or for any other purpose, and! also upon the balance of any account of the undersigned with said bank, and this notwithstanding such property or securities may have been or shall be deposited as security for some special purpose.” As substituted collateral to the $150,000 loan the notes of Milne, Turnbull & Co., endorsed by Kessler & Co. and set out in the bank’s proof of debt were received in August and September, 1907. These notes are now owned by the bank. When the loan was negotiated Kessler & Co. stated to the officers of the bank that the Milne notes were perfectly good and Milne, Turnbull & Co.’s account had both merchandise and assigned accounts against it. The trustee of Kessler & Co. contended that the accounts, the proceeds of which are in controversy, were assigned to Kessler & Co. to be applied when collected, in payment of Milne & Co.’s debt to Kessler & Co. and not as collateral security for advances. We agree with the referee in thinking that Kessler & Co.’s trustee is estopped from taking this position for the reason that in the firm’s dealing with the bank they were treated as collaterals, the bank being induced to make the loan relying upon the “merchandise and assigned accounts” which secured it. The bank had a right to assume that all the security which Kessler & Co. held for the payment of the notes was equally available to it when the notes were transferred. Kessler & Co., Ltd., having $10,000 of Milne, Turnbull & Co.’s notes are similarly situated and it follows that the fund in question should be divided pro rata between them and the bank and! that the notes in the hands of the trustee of Kessler are not entitled to share in the fund.

There seems to he no doubt that by the transfer of the notes to the bank the equitable title to the collaterals which secured the notes came into the hands of the bank to the same extent as if they had been physically attached to the notes. This could not be done conveniently, but the character of the security does not change the title thereto. What the bank took was not Milne &r Co.’s notes, but those notes plus the accounts due them from their customers, but payable to Kessler & Co. Kessler & Co. having received the bank’s money, are not entitled to realize on the securities until their debt to the bank is paid. The accounts did not become their property, because, for the convenience of all concerned, they were permitted to collect them. We think the conclusion is irresistible that when the bank took the Milne notes it expected to receive, and Kessler & Co. expected to give- the bank, the benefit of all the collaterals which secured the notes and that when the accounts were paid to Kessler & Co. it was their duty as agents or trustees for the bank to apply the proceeds in payment of the notes. The district judge arrived at the same result as the referee, but, as he says, by a somewhat different process of reasoning. After reviewing the decisions in this and other states and finding a conflict of authority existing in other states and no decision in the courts of New York clearly disposing of the question, he found an analogy in the reasoning of Stevenson v. Black, 1 N. J. Eq. 343. After quoting from the opinion of the chancellor, he says:

“It seems to mo that that is exactly the situation here: Kessler was soieiy entitled to receive the proceeds of the accounts payable pledged by Jlilne, and he so remained down to the time of these, bankruptcies. These accounts were, to be sure, security for all tile notes that Kessler had, but when lie assigned some of the notes he became a trustee for his assignee to the extent, of the face value of the notes in question.

“It can hardly need authority to show that in a court of equity the cestui quo trust is actually seized of the trust property; he may alien it, and any ‘legal conveyance by him will have the same operation in equity upon the trust as it would have had at law upon a legal estate. Croxall v. Shererd, 5 Wall. 281, 18 L. Ed. 572.

“It ■ can make no difference that a holder of collateral securing several notes assigns them successively and thereby diminishes the value of each note in the event of deficiency. Each cestui que trust takes his chances of that, but if (in this case) Kessler became a trustee for the bank by the act of assignment, no act of his, nor any change in his circumstances can change his relation to the cestui que trust he himself created. To the extent of his ability he is at all times bound to account for the trust he had himself created, and that duty has by operation of law descended to his trustee in bankruptcy.”

We think the conclusion reached below is correct, and that the order should be affirmed, with costs.

NOYES, Circuit Judge, dissents.