Case Name: John G. Stackhouse, as Trustee in Bankruptcy of the Estate of Otis L. Humphrey and Seward W. Holdridge, Bankrupts, Appellant, v. Alexander M. Holden, Respondent
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1901-11
Citations: 66 A.D. 423
Docket Number: 
Parties: John G. Stackhouse, as Trustee in Bankruptcy of the Estate of Otis L. Humphrey and Seward W. Holdridge, Bankrupts, Appellant, v. Alexander M. Holden, Respondent.
Judges: 
Reporter: Appellate Division Reports
Volume: 66
Pages: 423–433

Head Matter:
John G. Stackhouse, as Trustee in Bankruptcy of the Estate of Otis L. Humphrey and Seward W. Holdridge, Bankrupts, Appellant, v. Alexander M. Holden, Respondent.
Book accounts pledged by merchants to a banker as collateral security—the fact that the proceeds are used by the merchants in their business does not make the pledge fraudulent as to creditors.
"Where merchants assign hook accounts, listed at §20,872.81, to their hanker, as collateral security for an overdraft of their hank account, and agree to collect the assigned accounts and to deposit the proceeds in their hank account, the fact that the merchants did not keep the moneys realized upon the assigned accounts separate from the other moneys derived from the business, but used .such moneys indiscriminately in their business, or else deposited the moneys in the bank account and. drew checks against the same for use in the business, does not, in the absence of bad faith on the part of the merchants or the banker, render the assignment fraudulent as to creditors.
Adams, P. J., and Sprino, J., dissented.
Semble, that the rules, relative to a sale or pledge of goods and chattels unaccompanied by possession, do not apply to a sale or pledge of a chose in action.
Appeal by the plaintiff, John G-. Stackhouse, as trustee in bankruptcy of the estate of Otis L. Humphrey and Seward W. Hold-ridge, bankrupts, from that portion of a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk, of the county of Monroe on the 16th day of March, 1901, upon the decision of the court rendered after a trial at the Monroe Special Term which adjudges the assignment of certain accounts to be valid..
Norman D. Fish, for the appellant.
William N. Cogswell, for the respondent.
Judgment affirmed, with costs, on opinion of Rash, J., delivered at Special Term.
All concurred, except Spring, J., who dissented in opinion, and Adams, P. J., who dissented upon the second ground stated in opinion of Spring, J.
' The following is the opinion of Rash, J., delivered at Special Term:

Opinion:
Nash, J.:
This is an action to set aside an assignment of book accounts-aggregating $20,872.81, made by the firm of Humphrey & Hold-ridge to their banker, the defendant, on' the 2d day of October,, 1899, upon the grounds that such assignment was fraudulent and also voidable under the Bankruptcy Law. (30 U. S. Stat. at Larger 544.) The defendant's answer denied this. An involuntary petition in bankruptcy against said firm was filed December 6, 1899,. and they were declared bankrupts on the 19th day of December, 1899, and the plaintiff was appointed trustee-of their estate. - 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 & Hold- ridge and Neil, their bookkeeper, that itntil 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 & 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 coining 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 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 -«rere 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 turn 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 plaintiff'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 concession was not made until after the plaintiff had been to the expense of preparing for trial, the recovery should be with costs.