Source: https://supreme.justia.com/cases/federal/us/268/353/
Timestamp: 2019-04-26 05:45:36+00:00

Document:
1. By the law of New York, a transfer of property, as security for a debt, which reserves to the transferor the right to dispose of the property or to apply its proceeds for his own uses is fraudulent and void as to creditors. P. 268 U. S. 360.
2. This rule applies to the assignment of present and future book accounts as well as to assignment of chattels, since it does not result from the retention of ostensible ownership by the assignor, but from the fact that the reservation of dominion by him is inconsistent with the effective disposition of title and creation of a lien. P. 268 U. S. 361.
lien in the assignee, but were unlawful preferences, under the Bankruptcy Act. P. 268 U. S. 364.
Certiorari to a judgment of the circuit court of appeals which affirmed an order of the district court requiring a receiver and trustee in bankruptcy to pay over money collected from accounts receivable to a creditor of the bankrupt claiming them as security under an assignment, and denying the trustee's petition that the creditor be required to pay over collections made by him under the assignment.
appears, all accounts which had arisen after the date of the assignment, and were enumerated in the monthly list of accounts outstanding which was delivered to Ratner September 23. Benedict resisted the petition on the ground that the original assignment was void under the law of New York as a fraudulent conveyance; that, for this reason, the delivery of the September list of accounts was inoperative to perfect a lien in Ratner, and that it was a preference under the Bankruptcy Act. He also filed a cross-petition in which he asked that Ratner be ordered to pay to the estate the proceeds of certain collections which had been made by the company after September 17 and turned over to Ratner pursuant to his request made on that day. The company was then insolvent, and Ratner had reason to believe it to be so. These accounts also had apparently been acquired by the company after the date of the original assignment.
The district judge decided both petitions in Ratner's favor. He ruled that the assignment executed in May was not fraudulent in law; that it created an equity in the future acquired accounts; that, because of this equity, Ratner was entitled to retain, as against the bankrupt's estate, the proceeds of the accounts which had been collected by the company in September and turned over to him; that, by delivery of the list of the accounts outstanding on September, 23, this equity in them had ripened into a perfect title to the remaining accounts, and that the title so perfected was good as against the supervening bankruptcy. Accordingly, the district court ordered that, to the extent of the balance remaining unpaid on his loans, there be paid Ratner all collections made from accounts enumerated in any of the lists delivered to Ratner, and that the cross-petition of Benedict be denied. There was no finding of fraud in fact. On appeal, the circuit court of appeals affirmed the order. 282 F. 12. A writ of certiorari was granted by this Court. 259 U.S. 579.
The rights of the parties depend primarily upon the law of New York. Hiscock v. Varick Bank of N.Y., 206 U. S. 28. It may be assumed that, unless the arrangement of May 23 was void because fraudulent in law, the original assignment of the future acquired accounts became operative under the state law, both as to those paid over to Ratner before the bankruptcy proceedings and as to those collected by the receiver, [Footnote 1] and that the assignment will be deemed to have taken effect as of May 23. Sexton v. Kessler, 225 U. S. 90, 225 U. S. 99. That being so, it is clear that, if the original assignment was a valid one under the law of New York, the Bankruptcy Act did not invalidate the subsequent dealings of the parties. Thompson v. Fairbanks, 196 U. S. 516; Humphrey v. Tatman, 198 U. S. 91. The sole question for decision is therefore whether, on the following undisputed facts, the assignment of May 23 was in law fraudulent.
demand a full disclosure of the business and financial conditions; to require that all amounts collected be applied in payment of his loans, and to enforce the assignment although no loan had matured. But, until he did so, the company was not required to apply any of the collections to the repayment of Ratner's loan. It was not required to replace accounts collected by other collateral of equal value. It was not required to account in any way to Ratner. It was at liberty to use the proceeds of all accounts collected as it might see fit. The existence of the assignment was to be kept secret. The business was to be conducted as theretofore. Indebtedness was to be incurred, as usual, for the purchase of merchandise and otherwise in the ordinary course of business. The amount of such indebtedness unpaid at the time of the commencement of the bankruptcy proceedings was large. Prior to September 17, the company collected from accounts so assigned about $150,000, all of which it applied to purposes other than the payment of Ratner's loan. The outstanding accounts enumerated in the list delivered September 23 aggregated $90,000.
not true that the rule stated above and invoked by the receiver is either based upon or delimited by the doctrine of ostensible ownership. It rests not upon seeming ownership because of possession retained, but upon a lack of ownership because of dominion reserved. It does not raise a presumption of fraud. It imputes fraud conclusively because of the reservation of dominion inconsistent with the effective disposition of title and creation of a lien.
"upon the ground that such sale and application of proceeds is the normal and proper purpose of a chattel mortgage, and within the precise boundaries of its lawful operation and effect. It does no more than to substitute the mortgagor as the agent of the mortgagee to do exactly what the latter had the right to do, and what it was his privilege and his duty to accomplish. It devotes, as it should, the mortgaged property to the payment of the mortgage debt."
The permission to use the proceeds to furnish substitute collateral "provides only for a shifting of the lien from one piece of property to another taken in exchange." Brackett v. Harvey, 91 N.Y. 214, 221-223.
On the other hand, if the agreement is that the mortgagor may sell and use the proceeds for his own benefit, the mortgage is of no effect, although recorded. Seeming ownership exists in both classes of cases because the mortgagor is permitted to remain in possession of the stock in trade and to sell it freely. But it is only where the unrestricted dominion over the proceeds is reserved to the mortgagor that the mortgage is void. This dominion is the differentiating and deciding element. The distinction was recognized in Sexton v. Kessler, 225 U. S. 90, 225 U. S. 98, where a transfer of securities was sustained. [Footnote 17] It was pointed out that a reservation of full control by the mortgagor might well prevent the effective creation of a lien in the mortgagee, and that the New York cases holding such a mortgage void rest upon that doctrine.
The results which flow from reserving dominion inconsistent with the effective disposition of title must be the same whatever the nature of the property transferred. The doctrine which imputes fraud where full dominion is reserved must apply to assignments of accounts although the doctrine of ostensible ownership does not. There must also be the same distinction as to degrees of dominion. Thus, although an agreement that the assignor of accounts shall collect them and pay the proceeds to the assignee will not invalidate the assignment which it accompanies, [Footnote 18] the assignment must be deemed fraudulent in law if it is agreed that the assignor may use the proceeds as he sees fit.
Stackhouse v. Holden, 73 N.Y.S. 203, is relied upon by Ratner to establish the proposition that reservation of dominion does not invalidate an assignment of accounts. The decision was by an intermediate appellate court, and, although decided in 1901, appears never to have been cited since in any court of that state. [Footnote 22] There was a strong dissenting opinion. Moreover, the case is perhaps distinguishable on its facts, p. 426. Greey v. Dockendorff, 231 U. S. 513, upon which Ratner also relies, has no bearing on the case at bar. It involved assignment of accounts, but there was no retention of dominion by the bankrupt. The sole question was whether successive assignments of accounts by way of security, made in pursuance of a contract, were bad because the contract embraced all the accounts. The lien acquired before knowledge by either party of insolvency was held good against the trustee.
Williams v. Ingersoll, 89 N.Y. 508, 518-520; Coats v. Donnell, 94 N.Y. 168, 177. See Rochester Distilling Co. v. Rasey, 142 N.Y. 570, 580; MacDonell v. Buffalo Loan, etc., Co., 193 N.Y. 92, 104. Compare New York Security & Trust Co. v. Saratoga Gas, etc., Co., 159 N.Y. 137; Zartman v. First National Bank, 189 N.Y. 267.
Griswold v. Sheldon, 4 N.Y. 581; Edgell v. Hart, 9 N.Y. 213; Russell v. Winne, 37 N.Y. 591; Southard v. Benner, 72 N.Y. 424; Potts v. Hart, 99 N.Y. 168; Hangen v. Hachemeister, 114 N.Y. 566; Mandeville v. Avery, 124 N.Y. 376; Skilton v. Codington, 185 N.Y. 80; Zartman v. First National Bank, 189 N.Y. 267; In re Marine Construction & Dry Docks Co., 135 F. 921; 144 F. 649; In re Davis, 155 F. 671; In re Hartman, 185 F.196; In re Volence, 197 F. 232; In re Purtell, 215 F.191; In re Leslie-Judge Co., 272 F. 886. Compare Frost v. Warren, 42 N.Y. 204; also 73 U. S. Aird, 6 Wall. 78; Robinson v. Elliot, 22 Wall. 513; Smith v. Craft, 123 U. S. 436; Means v. Dowd, 128 U. S. 273; Etheridge v. Sperry, 139 U. S. 266; Huntley v. Kingman, 152 U. S. 527; Knapp v. Milwaukee Trust Co., 216 U. S. 545.
Edgell v. Hart, 9 N.Y. 213, 216; Zartman v. First National Bank, 189 N.Y. 267.
Russell v. Winne, 37 N.Y. 591, 595; Southard v. Benner, 72 N.Y. 424, 432; Potts v. Hart, 99 N.Y. 168, 172-173.
Russell v. Winne, 37 N.Y. 591, 593; In re Leslie-Judge Co., 272 F. 886, 888.
Potts v. Hart, 99 N.Y. 168, 171; N.Y. Personal Property Law § 45; Laws, 1911, c. 626, authorizes the creation of a general lien or floating charge upon a stock of merchandise, including after-acquired chattels, and upon accounts receivable resulting from the sale of such merchandise. It provides that this lien or charge shall be valid against creditors provided certain formalities are observed and detailed filing provisions are complied with. It is possible that, if its conditions are performed, the section does away with the rule "that retention of possession by the mortgagor with power of sale for his own benefit is fraudulent as to creditors."
Field v. Mayor, etc., of New York, 6 N.Y. 179.
Smith v. Acker, 23 Wend. 653; Griswold v. Sheldon, 4 N.Y. 581, 590; Edgell v. Hart, 9 N.Y. 213, 218; Conkling v. Shelley, 28 N.Y. 360. The statutes to this effect merely embody the common law rule. But, in New York, an additional statute provides that unrecorded chattel mortgages under such circumstances are absolutely void as to creditors. New York Lien Law § 230; Laws 1909, c. 38, § 230, as amended Laws 1911, c. 326, and Laws 1916, c. 348. See Seidenbach v. Riley, 111 N.Y. 560; Karst v. Gane, 136 N.Y. 316; Stephens v. Perrine, 143 N.Y. 476; Russell v. St. Mart, 180 N.Y. 355. See Stewart v. Platt, 101 U. S. 731, 101 U. S. 735. Compare Preston v. Southwick, 115 N.Y. 139; Nash v. Ely, 19 Wend. 523; Goodwin v. Kelly, 42 Barb. 194. In the case of a transfer of personal property by sale, retention of possession creates a rebuttable presumption of fraud. See Kimball v. Cash, 176 N.Y.S. 541; also New York Ice Co. v. Cousins, 48 N.Y.S. 799; Rheinfeldt v. Dahlman, 43 N.Y.S. 281; Tuttle v. Hayes, 107 N.Y.S. 22; Youngs v. Wedderspoon, 126 N.Y.S. 375; Sherry v. Janov, 137 N.Y.S. 792; Gisnet v. Moeckel, 165 N.Y.S. 82. In order to create a valid pledge of tangible personalty, there must be a delivery to the pledgee. In re P. J. Sullivan Co., 247 F. 139; 254 F. 660.
Niles v. Mathusa, 162 N.Y. 546; National Hudson River Bank v. Chaskin, 51 N.Y.S. 64; Curtis v. Leavitt, 17 Barb. 309, 364; Young v. Upson, 115 F.192. In 1916, § 230 of the New York Lien Law was amended to the effect that a mortgage, pledge, or lien on stocks or bonds given to secure the repayment of a loan is, if not recorded, absolutely void against creditors unless such securities are delivered to the mortgagee or pledgee on the day the loan is made. See N.Y.Laws 1916, c. 348.
Conkling v. Skelley, 28 N.Y. 360; Brackett v. Harvey, 91 N.Y. 214; Spaulding v. Keyes, 125 N.Y. 113; Briggs v. Gelm, 106 N.Y.S. 693. See Robinson v. Elliot, 22 Wall. 513, 89 U. S. 524; People's Savings Bank v. Bates, 120 U. S. 556, 120 U. S. 561.
Young v. Upson, 115 F.192. If it is agreed that the transferor may use the original collateral for his own purposes upon the substitution of other of equal value, the transfer is not thereby invalidated. Clark v. Iselin, 21 Wall. 360 (book accounts); Sexton v. Kessler, 225 U. S. 90 (negotiable securities); Chapman v. Hunt, 254 F. 768 (book accounts). Compare Casey v. Cavaroc, 96 U. S. 467.
Compare Mechanics' Bank v. Ernst, 231 U. S. 60, 231 U. S. 67.
Schaupp v. Miller, 206 F. 575; Grimes v. Clark, 234 F. 604; Gray v. Breslof, 273 F. 526, 527.
Mandeville v. Avery, 124 N.Y. 376, 382; Stimson v. Wrigley, 86 N.Y. 332, 338; Dutcher v. Swartwood, 15 Hun. 31.
It was cited in Young v. Upson, 115 F.192; In re Michigan Furniture Co., 249 F. 978, and in the opinion here under review.

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