Case Name: STACKHOUSE v. HOLDEN
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1901-11-12
Citations: 73 N.Y.S. 203
Docket Number: 
Parties: STACKHOUSE v. HOLDEN.
Judges: 
Reporter: West's New York Supplement
Volume: 73
Pages: 203–210

Head Matter:
(66 App. Div. 423.)
STACKHOUSE v. HOLDEN.
(Supreme Court, Appellate Division, Fourth Department.
November 12,1901.)
1 Bankruptcy—Assignment on Accounts—Preference—Evidence.
Where, in an action by a trustee in bankruptcy to reach accounts assigned by the bankrupt firm as collateral security for loans and advances to them, the evidence is undisputed that neither the creditor nor the bankrupts were aware that they were financially embarrassed until an examination made just before their general assignment, and that when the accounts were assigned the business was supposed to be prosperous, a finding that the accounts were assigned in contemplation of insolvency or as a preference would not be justified.
3. Same—Secrecy—Mingling Funds.
Where a mercantile firm, for the purpose of securing their indebtedness to and further advances from their banker, assigned lists of accounts to such banker from time to time as collateral security, and, retaining the books, collected the accounts, depositing the proceeds with other moneys of the firm, neither the fact that such transactions were private nor that the moneys so collected were mingled with the moneys of the firm rendered the transaction illegal or fraudulent as to other creditors.
3. Sales—Change of Possession—Pledge of Debt—Notoriety.
The rule pertaining to a change of possession of goods and chattels on a sale or pledge thereof, that the dealing must be open and visible because possession is evidence of ownership, does not apply to a sale or assignment of intangible property, as a debt, the necessities of business usually requiring that such transaction be private.
4. Debtor—Transfer of Property—Manner—Creditor.
Aside from the provisions of the bankrupt law prohibiting preferences, and subject to the rules of law relative to the transfers of goods and chattels, debtors may transfer, and pledge their personal property to their creditor in any manner they see fit.
6. Actions—Amount Recovered—Concession at Trial—Costs.
Where, in an action by a trustee to recover from a bank deposits made by the bankrupt, who was indebted to the bank, it is conceded at the "trial, but not before, that the trustee should recover the deposits made after the bank knew of the bankrupt’s insolvency, though the trustee recovers no more, he should recover costs.
McAdam, P. J., and Spring, J., dissenting.
Appeal from special term, Monroe county.
Action by John G. Stackhouse, as trustee in bankruptcy of the estate of Otis L. Humphrey and another, against Alexander M.. Holden. From parts of a judgment for defendant,, plaintiff appeals.
Affirmed.
Humphrey & Holdridge were copartners dealing in lumber, coal, and general produce at Honeoye Falls, in this state. The defendant was a private banker carrying on a bank at said village under the name of the Bank of Honeoye Falls. The firm did its banking business almost entirely with the .defendant, and from 1896 until its failure in the latter part of 1899 its account with the bank was continuously overdrawn. On July 1, 1899, as collateral security for this overdraft, it assigned to the defendant current book accounts amounting to $17,903.36. On October 2, 1899, the firm made another transfer of its accounts to the defendant listed at $20,872.84. The accounts included in the latter assignment embraced those covered by the preceding transfer except the sum of $5,407.47, which represented new accounts. The amount of the overdraft July 8, 1899, was $16,912.98, and on October 4th $17,697.67, and on October 31st it had increased to $18,992.13. On November 28th following, the copartners made a general assignment for the benefit of their creditors. On December 6th, involuntary bankruptcy proceedings were commenced, and on the 19th Humphrey & Holdridge were adjudged bankrupts, and later the plaintiff was appointed trustee of their estate. The unsecured liabilities of the firm exceeded $67,000, while their nominal assets were less than $30,000. The trustee commenced this action August 6, 1900, to set aside the assignment of said book accounts made on the 2d day of October 1899, on two grounds: (1) That such assignment was made within four months of the filing of the petition in bankruptcy, and made with the intention of giving preference to the defendant over the other creditors of the firm, and that defendant had reasonable cause to believe that such intent induced the assignment; (2) that at the time of such transfer the said firm was insolvent, and said assignment was fraudulent and void, by reason of the facts which will more fully appear in the opinion.
The following is the opinion at special term (NASH, J.);
“The fact that Mr. Holden did not know of the insolvency of Humphrey & Holdridge until it was disclosed to him just prior to their general assignment cannot, upon the evidence, be questioned. Besides his testimony, we have that of both Humphrey and Holdridge and Neil, their bookkeeper, that until the time they looked over the books of the firm with Mr. Holden, two or three days before the general assignment, they were not aware of the fact that the firm was financially embarrassed. There are no facts or circumstances from which to infer that they are not truthful in this, nor is it inherently improbable. It is not a new thing for a mercantile firm to suddenly find itself embarrassed- financially, and be obliged to succumb. If Humphrey and Holdridge and their bookkeeper were not aware that the firm was in an embarrassed condition, it is difficult to understand how Mr. Holden could have had any reasonable cause to believe that the firm was insolvent at the time of the last transfer of accounts to him, or that there was any intention of giving him by such transfer a preference over other creditors. The business of the firm was at that time apparently prosperous. The purchase of the building lot and the construction recently thereon of the two houses indicated that the firm had the money to spare from their business for that purpose. The permanent loans made by Mr. Holden to the firm were being reduced. The business relations of Humphrey & Holdridge with the firm of Willoughby & Hathaway were unknown to Mr. Holden, except that he supposed that the paper passing through the bank represented an indebtedness of the latter; and their commercial standing he had ascertained was good. The few instances of checks coming to the bank from Lima and some overdue farmers’ notes in the bank—isolated transactions, not of much importance of themselves as indicating the financial standing of the firm— did not come to the knowledge of the defendant. It seems to me that upon this branch of the case the burden then cast upon the plaintiff has not only not been met, but that the preponderance -of the evidence is with the defendant.
“The other proposition of the plaintiff is that the method which Humphrey & Holdridge and the defendant adopted for the purpose of supplying the firm with capital as it should be needed to carry on its business was fraudulent in law: that is to say, the transaction, however honestly entered into and performed, is not permissible in law. There is no question here as to the actual good faith of the defendant and of Humphrey & Holdridge. The agreement was that the latter should collect the assigned accounts, and deposit the proceeds in the" bank to their credit. They did this by collecting the accounts and depositing the proceeds, together with the other money of their business, in one account. The objection made, on behalf of creditors is that the pledgors mingled the money of the pledgee with their own, and used it in their business; that the identity of the money collected and received from the assigned accounts was lost, and the general creditors of the firm were thereby injured. It appears that all of the money of the business —that which came from the assigned accounts and that which came to the firm in the course of trade—was deposited in the defendant’s bank, or used directly in the purchase of goods, the avails of which were also deposited or went into accounts against customers, and from time to time assigned to the defendant. It also appears that some of the money was used by the members of the firm on personal account, but at all times there was a large amount of accounts not assigned which were in amount far in excess of any money applied to the personal use of the members of the firm. It is urged that by this method of giving security for the money defendant loaned to Humphrey & Holdridge, and the transaction of the business, it tied up their property, while at the same time it gave them absolute dominion over it, thereby creating a secret lien, and therefore a fraud upon creditors. In regard to the secrecy of the lien it may be observed that every pledge of securities may be, and generally is, done in secret. The dealings had with mercantile houses are always with knowledge that available bills and accounts receivable may be so used to procure credit or capital. The result of the exercise of dominion over the assigned accounts by Humphrey & Holdridge and the mingling of the moneys derived therefrom with that received in trade, so far as creditors are concerned, is the same as if the identity of the money which came to their hands from the assigned accounts had been preserved. If the latter method had been pursued,—the proceeds of the accounts would have been paid into the bank, and the credit set off against the overdraft,-—the money borrowed at the bank by means of the overdraft would have been separately used in their business, new customers’ accounts would have been made, and these in return assigned, and the process repeated to the end. In that case the identity of the money received from the accounts and the business would have been preserved, but the total amount would have been the same, whether kept separate or mingled together in one ■account. The rules pertaining to a" change of possession of goods and chattels upon a sale thereof, or to the filing of a lien 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. The plaintiif’s right to recover the amount of the deposit made after the insolvency of Humphrey & Holdridge became known to the defendant is conceded. It is suggested that it should be with costs to the defendant after the joining of issue, but, as there was no formal offer, and as the con■cession was not made until after the plaintiff had been to the expense of -prenaring for trial, the recovery should be with costs.”
Argued before ADAMS, P. J., and McLENNAN, SPRING, WILLIAMS, and HISCOCK, JJ.
Norman D. Fish, for appellant.
William N. Cogswell, for respondent,

Opinion:
PER CURIAM.
Affirmed on opinion of special term.