Court Opinion

ID: 8772107
Source: CourtListenerOpinion
Date Created: 2022-11-26 12:48:28.400934+00
Date Added: 2024-06-11T17:02:16.520423
License: Public Domain

BUFFINGTON, Circuit Judge
(dissenting). In the court below the Fourth Street National Bank of Philadelphia- asserted a lien on the proceeds of certain wheat in bulk and on 1,200 barrels of flour of the Millbourne Mills Company, the bankrupt, which lien it claimed to have as security for loans made by the bank to said company. That court denied such lien and awarded the fund in question to the trustee in bankruptcy. Thereupon the bank filed this petition to review. The facts of the case are that more than four months prior to its bankruptcy the Millbourne Mills Company obtained loans from the bank on notes, and at the same, time gave as security therefor its indorsed certificates, which, in the case of the flour, were as follows:
“Flour Certificate.
“Millbourne Mills Company.
“No. 1. ' Philadelphia, March S, 1907.
“This is to certify that Millbourne Mills Company has stored in its warehouse, basement floor, section A, * * * 200 barrels of flour, branded U, * * * which will be subject to its order, and only deliverable upon the in-dorsement and surrender of this certificate.
“George B. Hiclss, Jr., Supt. of Warehouse.
“Countersigned: B.. S. Dewees, President.
“Flour Certificate.’’
*187This flour was branded “U" on the barrels which were stored in a basement warehouse of the mill. The flour was divided into marked-off sections by upright posts, in each of which a certain number of barrels were stored. These were described by marks and were further identified by the exact number of barrels in the separate certificates which were issued for each lot. By agreement of the parties the flour remained in the mills company’s warehouse and in the special custody of Hicks, its superintendent. After the certificates were issued, a notice was posted, “None of this flour to be touched by any employé,” and pursuant to the agreement no flour was used; but it remained intact until after bankruptcy, when, on assertion of a lien thereon by the bank, it was, by agreement of the parties, sold by the trustee, and the proceeds, which were less than the bank’s notes, substituted for the flour.
Two questions arise in this case: First, as between the mills company and the bank, did the latter, under the law of Pennsylvania, at the time of bankruptcy, have an equitable lien on this flour? Secondly, if so, did the trustee take the flour subject to such lien? The first question is to be settled by the Pennsylvania state decisions. “The question of the extent and validity of the pledge were local questions and the decisions of the court of New York are to be followed by this court.” Hiscock v. Varick Bank, 206 U. S. 28, 27 Sup. Ct. 681, 51 L. Ed. 945, and cases cited. The second question depends on the bankrupt law and federal decisions.
In taking up the first question, it should be noted in limine that the case before us is one of entire good faith. It was a business transaction of unquestioned integrity and supposed efficacy. It was noi the sort of transaction involved in Security Company v. Hand, 206 U S. 415, 27 Sup. Ct. 720, 51 L. Ed. 1117, where not only was the attempted pledge void under the laws of Wisconsin, but was one the Supreme Court designated as “a mere pretense, a sham,” which the Circuit Court of Appeals in Security Co. v. Hand, 143 Fed. 32, 74 C. C. A. 186, said, “with regard to Wisconsin law, was a fraud in fact,” and which this court in Davis v. Crompton, 158 Fed. 742, 85 C. C, A. 633, stated was “a fraud in fact.”
Before turning to the Pennsylvania decisions, we note that equitable, liens are a generally recognized means of security, and their nature is thus defined in Pomeroy’s Equity, § 1235:
“The doctrine may be stated in its most general form that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation, * * * creates an equitable lien upon the property so indicated, which is enforceable. * * * In order, however, that a lien may arise in pursuancé of this doctrine, the agreement must deal with some particular property, either by identifying it, or by so describing it that it can be identified, and must indicate with sufficient clearness and intent that the property so described or rendered capable of identification is to be held, given, or transferred as security for the obligation.”
This statement, cited and approved in Walker v. Brown, 165 U. S. 654, 17 Sup. Ct. 453, 41 L. Ed. 865, is in accord with numerous federal decisions. Ketchum v. St. Louis, 101 U. S. 306, 25 L. Ed. 999; *188Fourth Street National Bank v. Yardley, 165 U. S. 635, 17 Sup. Ct. 439, 41 L. Ed. 855; Burdon Sugar Refining Co. v. Payne, 167 U. S. 127, 17 Sup. Ct. 754, 42 L. Ed. 105; Philadelphia Warehouse Co. v. Winchester (C. C.) 156 Fed. 600; Bridgeport Co. v. Maeder, 72 Fed. 115, 18; C. C. A. 451; Clark v. Sigua Iron Co., 81 Fed. 312, 26 C. C. A. 423; Sheffield Company v. Witherow, 149 U. S. 578, 13 Sup. Ct. 936, 37 L. Ed. 853.
The characteristics of an equitable lien, thus generally recognized, obtain also in Pennsylvania; but the decisions of that state go farther and hold that, where the property pledged is sufficiently designated, retention of the property by the pledgor by mutual consent does not, as between pledgor and pledgee, affect the validity of such lien. The case of Vandyke v. Christ, 7 Watts & S. (Pa.) 373, in which Chief Justice Gibson held that retention of property in a contract of sale, while fraudulent as to creditors by St. 13 Eliz., and as to purchasers by St. 27 Eliz., was not fraudulent between the parties at common law, is the law of that state to-day, and is followed in Wright v. Wigton, 84 Pa. 163, Smith v. Equitable Company, 215 Pa. 420, 64 Atl. 594, and other cases. And that retention of the pledge by the pledgor, where this is by the agreement of the parties, will not, as between pledgor and pledgee, defeat an equitable lien, is held in Collin's Appeal, 107 Pa. 605, 52 Am. Rep. 479, followed in Wallace’s Appeal, 104 Pa. 564, where the court, referring to the necessity of a change of possession, said:
“There is, however, a class of cases in which it is disregarded. They are cases in which the possession of the pledge is, by agreement of the parties, to remain with the pledgor. It is held that as the pledgor is bound, notwithstanding this provision of the contract, so are all bound who claim under him, except purchasers for value and without notice.”
After a discussion of numerous cases where equitable liens were enforced, although possession was retained by the owner, the court summed its conclusions by saying:
“The foregoing cases all relate to liens upon specific chattels, as to which it is almost universally necessary that possession should accompany the pledge in the hands of the pledgee to validate the lien; but we have seen that this requirement may be dispensed with, if such is the agreement of the parties, and the lien of the pledgee may be enforced by virtue of the contract.”
And in Sholes v. Asphalt Co., 183 Pa. 528, 38 Atl. 1029, where there was no separation or identification of the pledge, and it was held there was no lien, yet the exception was recognized where “the goods have remained in the possession of the pledgor as agent of the pledgee under an express agreement to that effect.”
From this it will be seen that under the Pennsylvania decisions the bank had an equitable lien on this flour, and had had it for more than four months prior to bankruptcy, and, had the mills company prior to bankruptcy sought to dispose of the flour, the bank could have by bill enjoined it from so doing and on maturity of the note have enforced its lien. Indeed, the validity of the lien under the Pennsylvania decisions was conceded in the opinion of the court below, saying:
*189“The pledge is, no doubt, good as between the pledgor and pledgee in Pennsylvania as against creditors who have never levied.”
The first question must therefore, in accordance with the state decisions, be answered in the affirmative. Such being the case, we then have the status, not of a preference or lien within four months of bankruptcy, but of a lien valid under the state law prior to the bankruptcy, existing for more than four months, and which no provision of the bankrupt law invalidates.
The second question, viz., if so, did the trustee take the flour subject to such lien? must, under the federal decisions (York Co. v. Cassell, 201 U. S. 344, 26 Sup. Ct. 481, 50 L. Ed. 782; First National Bank v. Pennsylvania Trust Co., 124 Fed. 968, 60 C. C. A. 100; Davis v. Crompton, 158 Fed. 735, 85 C. C. A. 633), be also answered in the affirmative, for it is clear that the trustee in bankruptcy simply succeeded to the rights of the bankrupt, and, as conceded in the petitioner’s brief, took the property “subject to all of the equities impressed upon it in the hands of the bankrupt.”
It is contended, however, that the force of these decisions is qualified.by the late case of Bank v. Staake, 202 U. S. 149, 26 Sup. Ct. 584 (50 L. Ed. 967), where it was said:
“The rule that the trustee takes the estate of the bankrupt in the same plight as the bankrupt held it is not api>licable to liens which, although valid as to the bankrupt, are invalid as to creditors.”
But this language, which the court quoted from the opinion of the Circuit Court of Appeals (133 Fed. 717, 66 C. C. A. 547), must be read in connection with the subject-matter of that case. That subject was ail attachment, a “lien created by or obtained in or pursuant to any suit or proceeding at law or in equity,” which section 67, clause c, makes void. Under that statute it was sought to subrogate the trustee to the rights of the attaching creditor. It was of such a lien, one obtained by legal process, and which, be it observed, the statute itself declared void, that it was in effect said that the rule laid down in Hewit v. Berlin, 194 U. S. 296, 24 Sup. Ct. 690, 48 L. Ed. 986, and York v. Cassell, supra, that the trustee takes the estate in the same plight that the bankrupt held it, had no application because the lien before them was by the act itself declared invalid. It will thus be seen that the decisions noted are not affected by what was said in Bank v. Staake, supra.
It remains to discuss the wdieat. The mills company was engaged in manufacturing flour, and to do so it was forced to carry large amounts of wheat in bulk and in bins. In order to prevent this wheat from overheating, it had to be shifted occasionally from bin to bin. At times it was necessary to withdraw parts of the wheat for grinding. To enable it to purchase and carry this wheat in reserve, the mills company borrowed from the bank on notes, and at the same time delivered to it indorsed wheat certificates in the following form:
“Grain Certificate.
“Millbourne Mills Company.
“No. 2700. Philadelphia, 1906.
“This is to certify that Millbourne Mills Company has stored in its fireproof grain storage tanks 1,000 bushels No. 2 Penna. winter wheat; unloaded from *190cars No. --, which will be subject to its order and only deliverable upon the indorsement and- surrender of this certificate.'
“Benj. P. Hoopes, Supt. of Elevators.
“Countersigned: B.. S. Dewees, President.”
These certificates, as originally issued, covered grain in particular tanks for1 each certificate. The tanks adjoined the mill property and were connected with it -by a .slide or conveyor. This slide was locked, and by agreement of the'parties was kept under lock and key by an employé of the mills company. It was agreed between the parties that the mills company could not withdraw any of this wheat without first paying enough of the loan to effect a release, or furnishing other wheat to take its place. This was always done. Later it was found necessary to shift the grain from tank to tank as the inconvenience to all parties of holding the wheat in individual, tanks-for individual certificates was found impracticable. To meet this practical necessity, and in good faith, the agreement was therefore modified, so. that all the certificates were to cover all the grain in all the tanks of the storage system. As none but the certificates.here in question were issued, and as these, owing to loss and depreciation, were, at the date of bankruptcy, more than sufficient to cover all the grain in the bins, no. question of identity arose. Indeed, nothing further remained to be done by the lienor at any time, so far as the identity of the pledge was concerned. The agreement as above was kept, the grain remained under lock and key, and as withdrawals were made corresponding reductions were made on the certificates.
To me these propositions are clear:
First. It was the intent of both parties in good faith that the bank should have a lien on these goods, and the bank parted with its money on the strength of that intent.
Second. That under the decisions of the Supreme Court of Pennsylvania an equitable lien on identified personalty is good between pledg- or and pledgee where by agreement of the parties possession is retained by the former.
Third. That the trustee in bankruptcy took no higher rights than the pledgor had, but simply succeeded to them.
Fourth. That there is no provision in the bankrupt act which invalidates this equitable lien, which was acquired more than four months before bankruptcy.
Because the effect of this decision is to make the rights of a trustee rise higher than the bankrupt’s, by thus striking down a lien which was valid in Pennsylvania, and which is not invalidated by any provision of the bankrupt act, I am constrained to record my dissent.