| U.S. Circuit Court for the District of Southern New York | May 8, 1902
Defendant and cross claimant, as trustee in bankruptcy of the New York China, Glass & Toy Company, a corporation, withholds from complainant the proceeds of certain accounts paid by debtors of the bankrupt to him as trustee. These collections were made subsequent to assignments by the bankrupt corporation to complainant of these same accounts and claims. The assignments were taken by complainant as collateral security for the payment of loans and advances made to the bankrupt corporation by complainant pursuant to an agreement entered into with the president of the corporation early in September, 1899. The fund created by such collections passed into the possession and control of an assignee of the corporation for the benefit of creditors on December 30, 1899, and subsequently came into the possession and control of the trustee in bankruptcy appointed on March 15, 1900. Thereafter, pursuant to an order of this court, the fund was deposited by the trustee in the Colonial Trust Company, to the joint account of the complainant and defendant, pending a decision of this controversy. The suit is brought in equity by this secured creditor of the corporation to determine the ownership and control of the fund and the rights of complainant under and by virtue of the various assignments in writing made to him as collateral security. The corporation was adjudicated bankrupt in involuntary proceedings instituted by creditors on January 11, 1900. The undisputed proofs show that in the autumn of 1899 the New York China, Glass & Toy Company (which will hereafter, for convenience, be referred to as the “Company”), being unable to borrow from banks the necessary amount of money to prepare for its fall trade on account of a false report printed in a newspaper as to its financial condition, applied to the complainant, brother of the president of the company, for loans and advances to meet its merchandise
The transaction is admitted to be free from actual fraud or deceit. It was not seriously contended on the hearing that a preference was created by the act of transfer. A preference, within the scope of the bankrupt act, is created when it shall be given within four months of filing petition, and when the person receiving it has reasonable cause to believe it was intended to give a preference. We have no such claim here. The security was given for a present consideration, and therefore no fraud on creditors, under the bankruptcy act. In re Wolf (D. C.) 98 F. 84" court="N.D. Iowa" date_filed="1899-12-11" href="https://app.midpage.ai/document/in-re-wolf-8867519?utm_source=webapp" opinion_id="8867519">98 Fed. 84; In re Soudan Mfg. Co. (C. C. A.) 113 F. 804" court="7th Cir." date_filed="1902-02-12" href="https://app.midpage.ai/document/stites-v-dunnahoo-8746520?utm_source=webapp" opinion_id="8746520">113 Fed. 804. It does not appear that either the company or the' complainant at the time the loans were made had any knowledge of the company’s insolvency. The company was always a large borrower at that season of the year, and had ample reason for believing that the holiday trade would insure its commercial stability. The complainant was acquainted with the business of the corporation, and knew of the company’s customary financial needs at that season of the year.
The trustee contends that the transaction was in the nature of a pledge, and, as no possession of the property pledged passed, the pledge is not enforceable against creditors; that, although no actual fraud or deceit is charged, the transaction nevertheless was a fraud in law; that the essence of the transaction is presumed to be fraudulent and void as against the trustee representing creditors, as there was no delivery to the pledgee of the property pledged. It is insisted that the “Personal Property Law” applies. Laws N. Y. 1897,
“The fraud which vitiates the transfer does not consist in the failure to deliver possession of the assigned accounts to the defendant, for choses in action are not the goods and chattels covered by the statute condemning sales unaccompanied by delivery over of the property.”
The controlling opinion in the case last cited seems to be decisive of this question. The agreement in that case was that the assignor should collect the assigned accounts, and deposit the proceeds in a bank to their credit. I quote from the opinion, which aptly applies:
“The rules pertaining to a change of possession of goods and chattels upon a sale thereof, or to the filing of a Hen thereon, and the dominion required to be exercised by a purchaser, mortgagee, or pledgee of tangible property, cannot be applied to a sale or pledge of indebtedness, intangible of itself, only the evidence of which, if in writing, is perceptible. The conditions are not the same, and the rules of law applicable to transfers of the two classes of property differ. As to one the possession of which Is evidence of ownership, the dealings must be open, visible, and public; while as to the other the business may be, as It usually is, private. The necessities of business require it. Aside from the provision of the bankrupt law prohibiting preferences, and subject to the rules of law relative to transfers of goods and chattels, debtors may transfer and pledge their personal property to their creditors In any manner they see fit, and any attempt to apply fixed rules for the transaction of the business would interfere with this undoubted right.”
I am unable to perceive how a pledge of bills receivable could have been transferred more effectively in the absence of a statute requiring notice to be given than was actually done in the case at bar. Separate accounts were carried on the books of the company. The proceeds of accounts collected were immediately paid to the lender. Requests for renewal notes and extension of time of payment were referred to complainant for his decision. His right of possession is as fully demonstrated as the nature of the security would permit. But it is contended that it is essential to the validity of the transfer that notice should have been given to the debtors whose claims were assigned. This contention is unsound. The necessity for notice by an assignee to the debtor arises where he seeks to protect himself against a payment by the debtor to the original creditor. The debtor is released from liability to the assignee unless he has been notified of the assignment. Richardson v. Ainsworth, 20 How. Pr. 521" court="N.Y. Sup. Ct." date_filed="1861-02-15" href="https://app.midpage.ai/document/richardson-v-ainsworth-5469289?utm_source=webapp" opinion_id="5469289">20 How. Prac. 521; Heermans v. Ellsworth, 64 N.Y. 159" court="NY" date_filed="1876-02-08" href="https://app.midpage.ai/document/heermans-v--ellsworth-3580033?utm_source=webapp" opinion_id="3580033">64 N. Y. 159; Williams v. Ingersoll, 89 N. Y. 522. It is fully established by authority that complainant could legally authorize the company as agent for him to collect the assigned claims and accounts. Clark v. Iselin, 21 Wall. 360" court="SCOTUS" date_filed="1875-02-18" href="https://app.midpage.ai/document/clark-v-iselin-89021?utm_source=webapp" opinion_id="89021">21 Wall. 360, 22 L.
Since the argument of this case counsel request that I pass upon the question of a method of application of the collateral. I think that the various sums advanced must be taken as a continuous transaction. The proofs justify that conclusion. The president of the company informed complainant at the time arrangements for the loan were perfected that the company needed from $20,000 to $30,000, "not all at once, but as the business needs required.” For this reason I am of opinion that the claims paid must first be applied to the payment of the note for which they stand collateral. Any excess may then be generally applied on the indebtedness, including expenses incurred by complainant for collecting accounts after failure of the company. Unless the parties agree on amount of such expenses, an account will be taken by a master.
A decree may be entered accordingly, with costs.