Court Opinion

ID: 9640089
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:57:02.796135+00
Date Added: 2024-06-11T18:10:26.240853
License: Public Domain

*915SOPER, Circuit Judge
(dissenting).
The promise of Smith to pay the debt due by him to the Union Trust Company of Baltimore out of the proceeds of any sale of his property, did not give rise to a lien upon the property because it was not thereby placed beyond his control. Such a promise does not create a lien. Lone Star Cement Corp. v. Swartwout, 4 Cir., 93 F.2d 767, and cases cited; see, also, In re Interborough Consolidated Corp., 2 Cir., 288 F. 334, 32 A.L.R. 932; Long v. Farmers’ State Bank, 8 Cir., 147 F. 360, 9 L.R.A.,N.S., 585. So much is admitted; but it is said that when the property was sold, and the proceeds came into the hands of Gohen, whom Smith had sent to New York to receive them, a lien upon the proceeds arose because they were not then under the unfettered dominion and control of Smith.
This statement proceeds upon a mistaken view of the circumstances of the case. The fact is that Smith did not lose control of the proceeds of the sale until the sheriff took them from the possession of Gohen on November 25, 1931, immediately after the sale. The power of attorney to sell the property, which Smith had given to Gohen on November 18, 1930, had been revoked with Gohen’s express consent on April 16, 1931, six months before the sale took place. In the meantime, Smith had resumed charge of the negotiations for the sale, had sold the property himself, and had sent Gohen to New York to deliver the executed deed and receive the proceeds of sale in his stead. Even then, as the undisputed evidence shows, Gohen did not have authority to deliver the deed until he was authorized by a telephone message on the day of sale from Smith’s attorney in Huntington to do so. The legal situation was precisely the same as if Smith had gone to New York in person to consummate the transaction. He retained control until the end.
It is suggested that although Smith had control of the situation up to the moment that the bonds were delivered to Gohen, thereupon he lost it by reason of the previous promise which he and Gohen had made to the bank. This promise is spoken of as an agreement with the bank; but this is incorrect, for there was no correlative promise on the part of the bank to wait for its money until the property was sold, and Smith was at liberty to withdraw his promise at any time before the sale. The bank only gave a brief extension of the indebtedness to April 6, 1931, when the loan was put upon a demand basis, so that the bank on its part was free at any time thereafter to put the note in suit and sell the collateral. The bank, however, did wait until the sale took place. Whether it was moved by friendship for Smith and the Huntington Bank, with which its relations were very close, or by the well grounded fear that it would be difficult in that period of financial stress to sell 1600 shares of stock of the Huntington Bank to advantage, is immaterial. Having waited until the appointed time, the Baltimore bank could rightfully say that it had accepted Smith’s offer, and was entitled to the performance of his promise: But still there was no lien. The argument returns to the starting point. If a promise or an agreement to pay a debt out of a fund does not create a lien, obviously a breach of the promise cannot have this effect. Such was the decision of this court in Lone Star Cement Corp. v. Swartwout, supra, where the creditor continued to ship goods to the debtor upon his promise to pay the debt out of a certain fund; and the decision in B. Kuppenheimer & Co. v. Mornin, 8 Cir., 78 F.2d 261, 101 A.L.R. 75, where credit was extended to the debtor in consideration of a promise to pay the debt out of the proceeds of a sale of real estate. See, also, Hibernian Banking Ass’n v. Davis, 295 Ill. 537, 129 N.E. 540.
The fact that Gohen was also a party to the transaction does not alter the application of the established rule. His participation did not cause the transaction to amount to an appropriation of the fund to the payment of the debt. The situation is not like that which often obtains in the creation of an assignment, that is, it did not consist of an order or notice addressed by a debtor to a third person to pay over to the creditor funds or credits of the debtor in the third person’s control, whereby an appropriation takes place and title to the fund passes to the creditor. Gohen did not occupy the position of such a third person. He was merely the agent of Smith to collect the money and pay it to the bank. As we have shown, Smith kept control until the end, and he would have violated no contract right of Gohen, or of the bank, if, instead of sending Gohen, he had gone to New York himself to collect the proceeds of the sale. Gohen himself recognized that he was subject to Smith’s direction, for in a letter of August 16, 1931, to the bank, he stated that he was authorized to *916pay the debt out of the proceeds of the sale “provided he should be disbursing agent.” It is no answer to say that even if Smith had the power to revoke Gohen’s authority, he did not exercise it; for possession of the power to revoke signifies that unfettered dominion over the fund which is incompatible with the existence of a lien.
The authorities support the view that the designation of an agent by the debtor doer, not alter the general rule. For instance, the Supreme Court of Appeals of Virginia, whose decisions on the subject are cited with approval in Arnold v. Buckhannon Bank, 116 W.Va. 589, 183 S.E. 52, considered the precise question in Hicks v. Roanoke Brick Co., 94 Va. 741, 27 S.E. 596. A contractor, engaged in carrying on certain work under a public contract, wrote to his bank with reference to an account due one of his creditors, saying: “Out of my estimates which you will collect from the City of Roanoke, you will please settle the above account either in cash or city warrants as you may receive them; this assignment being intended to embrace said fund after the payment of the sums necessary for the current expenses of the work.” The court held that the writing did not give an equitable lien on the fund or operate as an equitable assignment, in view of the fact that it was not drawn on a debtor of the drawer, or on any person holding-funds belonging to him, and did not place the fund or any part of it in the control of the payee. For a similar decision see Rodick v. Gandell, Ch. 1849, 12 Beav. 325, affirmed C.A. 1851, 1 DeG., M. & G. 763.
In Lone Star Cement Corporation v. Swartwout, 4 Cir., 93 F.2d 767, this court had occasion to point out that since Christmas v. Russell, 14 Wall. 69, 20 L.Ed. 762, the leading case on the effect of a mere promise to pay a debt out of a fund when received, the Supreme Court has held that an equitable lien is created when the intention to do so is manifest from particular circumstances, as in an agreement between attorney and client that the fee of the attorney shall be paid out of a fund to be collected by him. See Barnes v. Alexander, 232 U.S. 117, 34 S.Ct. 276, 58 L.Ed. 530, and other cases cited. But the special circumstances of these decisions were stressed, and we expressed our approval of the views of Professor Williston on the subject in these words (93 F.2d at page 770)': “Professor Williston points out that a valid assignment is created by an agreement authorizing an attorney to collect the fund and pay himself by retaining his fee; but only a contract right is effected if the fund is to come into the hands of the client and he is to make the payment; and that whether such a right, though not amounting to an assignment, gives rise to an equitable lien is substantially the same question that arises whenever there is a contract to transfer in the future personal property not ordinarily the subject of the specific performance. We are in accord with his suggestion that the decision of the question involves the propriety of subordinating general creditors to a variety of equitable liens created by contracts referring to specific property, and that there seems -to be no reason to distinguish promises to pay money from a specific fund when received from promises to deliver specific goods when manufactured.”
It is worth while in passing to note that in the pending case, Smith not only promised to pay his debt to the bank out of the proceeds of the sale of the property, but also made similar subsequent promises to other creditors, and gave like orders to Gohen with respect thereto. This fact is important not merely because it has a bearing upon the general equity of the claim of the bank to priority over other creditors, but because it negatives an intention on Smith’s part to impose a specific lien upon the fund.
The pending case must be decided according to the law of West Virginia. This would have been true even if Erie Railroad Company v. Tompkins, 302 U.S. 671, 58 S.Ct. 50, 82 L.Ed. 518, had not given new vigor to the binding force of State decisions. Lone Star Cement Corp. v. Swartwout, 4 Cir., 93 F.2d 767, 770. It is therefore important to note that even if the federal courts have broadened the strict requirements of Christmas v. Russell, 14 Wall. 69, 20 L.Ed. 762 (see B. Kuppenheimer & Co. v. Mornin, 8 Cir., 78 F.2d 261, 264, 101 A.L.R. 75), such is not the case with the Supreme Court of West Virginia. That court has recently refused to follow such decisions as Barnes v. Alexander, 232 U.S. 117, 34 S.Ct. 276, 58 L.Ed. 530, insofar as they may seem to depart from the earlier rule, as is shown by the following quotation from Arnold v. Buckhannon Bank, 116 W.Va. 589, 183 S.E. 52. In that case the court was called on to pass upon the claim of a creditor to prior payment out of a designated fund. The plaintiff had lent money *917to a bank to be applied to the payment of interest on notes for which he was not responsible; and the bank agreed to repay him the advances out of the first money it received on the notes from the makers, or from a sale of the makers’ property. The court held that this was a mere agreement that the debt should be paid out of a designated fund when received by the debtor and was not an assignment of and created no equitable right to the fund. Commenting on the differences on the subject that have arisen in the federal courts, the .Supreme Court of West Virginia had this to say: “There is some difference of authority on a situation like this, occasioned mainly by the fluctuation thereon of the. federal courts. For demonstration of this statement, see the several holdings in Christmas v. Russell, 14 Wall. 69, 20 L.Ed. 762; In re Stiger (D.C.) 202 F. 791; Barnes v. Alexander, 232 U.S. 117, 34 S.Ct. 276, 58 L. Ed. 530; In re Interborough Consol. Corp. (C.C.A.) 288 F. 334, 32 A.L.R. 932; East Side Packing Co. v. Fahy Market (C.C.A.) 24 F.2d 644. The Virginia courts, however, are committed to the rule that to constitute an equitable assignment, the debtor must by order or otherwise place the creditor in position to compel payment of the debt from the holder of the fund; and that a mere agreement between debtor and creditor that the debt should be paid out of a designated fund, when received by the debt- or, is not an assignment of and creates no equitable right to the fund. Clayton v. Fawcett’s Adm’rs, 2 Leigh (29 Va.) 19; Eib v. Martin, 5 Leigh (32 Va.) 132; Feamster v. Withrow, 9 W.Va. 296, 313; Smith v. Patton, 12 W.Va. 541, 553. Tliis rule is supported by the great weight of authority. 5 C.J., subject Assignments, section 80; 19 A. & E. Ency. of Law, subject Liens, pp. 16, 17; Williston on Contracts, §§ 428, 429; Jones on Liens (3d Ed.) § 48; Lawrence on Eq. Juris., § 235; Pomeroy’s Eq. Juris. (4th Ed.) § 1283, note 1; Beach on Modern Eq. Juris., § 333; Bispham’s Principles of Eq. (7th Ed.) § 167. In Evans v. Rice, Trustee, 96 Va. 50, 30 S.E. 463, it was expressly held: ‘An agreement by a debtor to pay a debt out of the proceeds of the sale of a particular piece of property does not constitute an assignment of, or lien upon such proceeds, but is only the personal covenant of the debtor.’ Accord: American Pin Co. v. Wright, 60 N.J.Eq. 147, 149, 46 A. 215, 216, in which Vice-Chancellor Pitney said of a promise under seal of a debtor that he would devote the proceeds of the sale of his house to payment of a certain debt: T have been unable to find any authority which has gone so far as to hold an agreement of this kind to amount to a charge.’ ”
This controlling rule should be applied in the pending case, and the judgment of the District Court should be affirmed.