Source: https://supreme.justia.com/cases/federal/us/232/174/
Timestamp: 2019-04-22 19:59:40+00:00

Document:
In determining the relative rights of the trustee in bankruptcy and a secured creditor, the legal effect of the transaction securing the loan depends upon the local law.
The rule that physical retention by the vendor of goods capable of delivery to the vendee is a fraud per se does not apply in Pennsylvania in a transaction the inherent nature of which necessarily precludes delivery, or in which the absence of a physical delivery is excused by the applicable usages of trade.
Under the revenue laws of the United States, the government, although not strictly a bailee, is in complete control of a distillery warehouse which is in effect a bonded warehouse of the United States.
A distiller is not debarred from passing title or creating a special interest by way of pledge in whiskey deposited in his distillery warehouse in conformity with the revenue laws of the United States.
This Court will not condemn honest transactions growing out of the recognized necessities of a lawful business, and so held that the established practice of the distillery business to issue warehouse receipts for whiskey deposited in the distillery warehouse and pledge such receipts as security for loans is not one opposed to public policy.
In Pennsylvania, certificates issued by the owner of a distillery on whiskey in the distillery warehouse represent the property, and the delivery thereof as security for a loan made in good faith and in accordance with the usages of the trade amounts to actual delivery of the property itself.
The facts, which involve the relative rights of the trustee in bankruptcy, and the holder as security for loans of warehouse receipts for whiskey in a distilling warehouse issued by the distiller, are stated in the opinion.
On February 3, 1908, a petition in bankruptcy was filed against the Miller Pure Rye Distilling Company; it was adjudicated a bankrupt on February 19, 1908, and the appellant was appointed trustee. The Penn National Bank of Reading, Pennsylvania, the appellee, intervened in the bankruptcy proceeding with a petition asking for the delivery to it of 200 barrels of whisky stored in the bonded warehouse of the distilling company upon the ground that the property had been lawfully pledged by the company to the bank. The district court sustained the lien and accordingly held the claimant entitled to the delivery sought (176 F. 606), and, on appeal, this decree was affirmed by the circuit court of appeals (187 F. 689).
"United States Internal Revenue Distillery Bonded"
"Warehouse of Miller Pure Rye Distilling Company"
"Ryeland, Berks Co., Pa. August 26th, 1907"
Charges due Thereon, and Storage at the Rate of Five Cents per Barrel per month, from August 26th, 1907."
"Stored in Warehouse No. 2"
"Serial Nos. of Packages 7964/7988"
"Miller Pure Rye Distilling Co."
"Address all Communications to Miller Pure Rye Distilling Company, Philadelphia, Pa."
"Special Notice -- Particular care should be taken of this Certificate, as the whisky cannot be delivered without its surrender."
These receipts were indorsed by the company, and, with the gauger's certificates, were delivered to the bank. The whisky itself was not actually delivered, and remained in the bonded warehouse. The note not being paid at maturity, the bank, upon notice, sold the warehouse receipts at public sale on February 5, 1908, and became the purchaser. This sale, however, is not material to the present question, which turns upon the validity of the lien.
There is no doubt as to the intention and actual good faith of the parties. The loan was made in reliance upon the designated security, and the ground of attack is that the lien failed for want of delivery of possession.
Pennsylvania in respect of the question we are now considering is settled by a line of cases extending through nearly a century. Starting with the policy of the statute of Elizabeth for the circumvention of fraud and deceit in sales of personal property (which nowhere in terms refers to retention of possession by a vendor), it has wisely developed the spirit of that statute and evolved the salutary rule that, where there is nothing in the case but the retention of a physical possession by the vendor, which he is capable of delivering to the vendee, such retention is fraud per se, and not merely evidence of fraud, even though there be nothing inconsistent with the most perfect honesty. But this rule is not applied by the courts of Pennsylvania to cases where the inherent nature of the transaction and the attendant circumstances are such as to preclude the possibility of a delivery by the vendor that would be consistent with the avowed and fair purpose of the sale, or where the absence of a physical delivery is excused by the usages of the trade or business in which the sale was made."
444, 187 F. 689, 696.
We entertain no doubt as to the correctness of this statement (Clow v. Woods, 5 S. & R. 277; Barr v. Reitz, 53 Pa. 256; McKibbin v. Martin, 64 Pa. 352; Crawford v. Davis, 99 Pa. 576; Stephens v. Gifford, 137 Pa. 219; Pressel v. Bice, 142 Pa. 263; Garretson v. Hackenberg, 144 Pa. 107; Barlow v. Fox, 203 Pa. 114; White v. Gunn, 205 Pa. 229), and it was in the light of these principles that the court below held that, considering the situation of the property and the usages of the business, the transaction in question was valid.
"a warehouse, to be situated on and to constitute a part of his distillery premises, and to be used only for the storage of distilled spirits of his own manufacture until the tax thereon shall have been paid."
"under the direction and control of the collector of the district, and in charge of an internal revenue storekeeper, assigned thereto by the Commissioner"
"shall be kept securely locked, and shall at no time be unlocked or opened or remain open unless in the presence of such storekeeper or other person who may be designated to act for him as provided by law, and no articles shall be received in or delivered from such warehouse except on an order or permit addressed to the storekeeper and signed by the collector having control of the warehouse"
therein, the name of the distiller, the date of the receipt in the warehouse, and the serial number of each cask or package, in progressive order, as the same are received from the distillery"
(§ 3287; act of May 28, 1880, 21 Stat. 147, c. 108, § 6). The spirits must be entered for deposit in the warehouse under the regulations prescribed by the commissioner, and bond must be given for the payment of the tax. The statute gives the form of the entry which, made in triplicate and duly verified, must set forth the name of the person making it, the designation of the warehouse, the specification of the spirits deposited, with the marks and serial numbers of the packages, etc., and a statement of the amount of tax. Withdrawal may be made on payment of the tax -- which is payable within eight years -- by application to the collector in charge of the warehouse, and the making of a withdrawal entry (§§ 3293, 3294, Act of May 28, 1880, 21 Stat. 145, 146, c. 108, §§ 4, 5; Act of August 27, 1894, 28 Stat. 563, c. 349, § 49). Provision is made for regauging and for an allowance for loss from leakage or evaporation (id., § 50; Act of March 3, 1899, c. 435, 30 Stat. 1349; Act of Jan. 13, 1903, c. 134, 32 Stat. 770), and, after four years, the spirits may be bottled in bond, in a separate portion of the warehouse set apart for that purpose, under the supervision of the government official (Act of March 3, 1897, c. 379, 29 Stat. 626). The storekeeper is to keep "a warehouse book" in which all deposits and deliveries are to be entered with appropriate description, including marks and serial numbers (§ 3301). And the removal "of and distilled spirits from a distillery warehouse . . . in any manner other than is provided by law" is punishable by fine and imprisonment (§ 3296).
"the unbroken custom of the trade to treat storage receipts for spirits as completely equivalent to the spirits themselves, and to sell or pledge them freely without question."
This finding is approved by the circuit court of appeals, and the fact that this custom exists we understand to be undisputed.
which is incident to the exercise of governmental power in no way limits its effect upon the distiller's relation to the goods. They are effectually taken out of his power, so that he is absolutely unable to make a physical delivery of them until the tax is paid. On the other hand, to pay the tax and remove the property before the aging process is completed would defeat the object of the deposit for which the statute provides, and would frustrate the purpose of a transfer of spirits in bond, which is an entirely lawful transaction. In these circumstances, the certificates -- such as were here used -- appropriately represent the property.
It is said that the distiller need not use his own warehouse, but may place the goods in one of he general bonded warehouses established under the Act of 1894 (28 Stat. 564, 565). The appellee asserts that this would be impracticable; that no general bonded warehouse had been established in the collection district in question; that there are only twelve in the entire country, with a capacity that is extremely small in comparison with the output of the distilleries. But, aside from this, the distillery warehouse is equally recognized by law; it is "a bonded warehouse of the United States." If it is a fit place for storage, the distiller is not obliged to remove the spirits elsewhere. And while they are thus deposited in conformity with law, he is not debarred from passing title or creating a special interest by way of pledge.
under governmental control, and are transferred by the delivery of such documents as we have here. There is no warrant for saying that creditors are misled by delusive appearances. The usage serves a fair purpose, and there is no public policy which requires that the trade should be thrown into disorder by a refusal to uphold it. It is urged that frauds may be perpetrated by the duplication of such documents; but the present dispute does not call for the determination of the equities as between two innocent purchasers. We are concerned here simply with the rights of creditors represented by a trustee in bankruptcy, and we agree with the court below in its conclusion that, in the circumstances disclosed, his right is inferior to that of the appellee.

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