I do not think it necessary to add anything to the referee’s report, except upon two questions: First, the •need of proving that the defendant knew that the bankrupts intended a preference; second, the defense of an equitable lien.
[1] Upon the first point Alexander v. Redmond, 180 Fed. 92, 103 C. C. A. 446, is conclusive. It is idle to say that the opinion is obiter. I tried the case below, and, being of different opinion, decided it expressly, because the element of an intent to prefer was lacking. The reversal was therefore expressly upon that point, and the case settles the law in this circuit.
The second point is without doubt difficult, and requires careful analysis into the difference of intention between an obligation and a property right, which closely approach each other under these circumstances. I shall assume two things, which are at least not conceded. First, I assume that the written contracts may be varied by proof of a custom; second, that the custom would be valid, if it existed and actually gave a lien upon the assets. What, then, is the defendant’s position? It is this: Under the custom of banks and brokers, first, the certified checks, when withdrawn from the bank, remain in equity still the bank’s property, call the right a trust or whatever you will; second, the broker may use them only to relieve securities, either pledged or purchased, from liens upon them for money lent, or for purchase price duethird, the securities, when the broker receives them, are subject to an equitable lien equal in amount to the bank’s advances upon them, and that lien remains, not only upon them, but upon any money or other property which the broker may get by pledging or by selling them, so that if the broker, having sold the released securities, reinvests the moneys, the lien would remain upon the new securities so purchased. In other words, the actual intention of the parties here effects, the defendant says, what the law would itself impose, if the funds were at any time in the hands of the broker affected with an equitable lien or an implied or constructive trust. Now, this is a perfectly intelligible position, whether or not it be a sound one, and I must concede to the defendant that it does not seem to me to be an answer merely to show that the broker is free to pledge or sell the securities pledged with the bank’s money, because
[2] On the other hand, all that actually takes place is consistent with the absence of any lien whatever, and with merely a restriction upon the use of the checks to the release of securities, and a strict 'requirement that the loan be paid at the close of the day. Nothing which the brokers do indicates that they regard the property in their hands as subjected to any lien, because it is not enough that they are restricted in the use of the funds. For example, A. may lend B. money only on condition that B. put it in his business. A. would have no lieu. Even if B. were to promise A. to pay him out of the funds in his business, A. -would have no lien. Dillon v. Barnard, 21 Wall. 430, 22 L. Ed. 673; Franklin v. Browning. 117 Fed. 226, 54 C. C. A. 258; Barrington v. Evans, 3 Y. and C. 384. Justice Clifford says in Dillon v. Barnard, on page 439 of 21 Wall. (22 L. Ed. 673), that there must be—
"some act of appropriation oil the part of the employer” ("the promisor) “depriving himself of the control of the funds, and conferring upon llie contractor” (the promisee) “the right to have them applied to his payment when the services are rendered or the mat ('rials are furnished. There must be a relinquishment by the employer of his right of dominion over the funds, so that without his aid or consent the contractor can enforce (heir application to his payment when his contract is completed. Nothing in the prac (ice of the parties justifies any such inference as that indicated.”
[3] A lien means that the lienor is to have the right to take his debt out of some specified res, which may, it is true, be a changing fund, but nevertheless must be ascertainable since it is a property right. To take out one’s debt from a res is a very much more stringent right than to restrict the borrower’s rights in the money you lend him, or even to promise to pay him from a fund. It seems hardly necessary to elaborate so obvious a distinction. Walker v. Brown, 165 U. S. 654, 17 Sup. Ct. 453, 41 L. Ed. 865. Again, the necessity of paying back the loan by 3 o’clock does not indicate that the bank meanwhile has any lien upon the funds, especially as the sources of payment are, naturally enough, indifferent to the bank itself. Nor is it significant that the bank should be interested in the kind of security in which the broker deals, because the loan represents so large a part of the broker’s indebtedness that its proceeds will for the time being be the greater part of his assets. Eurther, the need of beginning to pay back the loan by 12 o’clock shows nothing, though the evidence really shows that the brokers have till 3 to begin to pay, because a creditor is under such circumstances naturally prone to suspicion if the debtor remains longer than necessary with so large a load of indebtedness. Indeed, the belief of a lien upon the broker’s assets would rather tend to less close scrutiny of the time of his repayments.
While, therefore, the use of funds by the broker does not necessarily preclude the existence of a lien, there is nothing in the practice of business which at all requires it to be interpreted in such terms. It is quite true that these “clearance” loans arc merely to enable bro
All the evidence of custom, therefore, seems to me not to help the defendant in the least; on the other hand, some of it seems to injure its cause. For instance, if the brokers kept the “clearance” loan securities separate, or in any wa)'- distinguished the bank’s supposed property from their own, there might be color for the claim of a lien; but, unfortunately for the bank, they mix everything indiscriminately. Now it is still possible that the lien is to be regarded as existing, even when for motives of convenience it is not kept defined; but upon the balance of probabilities the absence of any distinction must weigh. It would also be some evidence of intent if the “clearance” funds were not mingled with other funds in one deposit confessedly within the broker’s power to use as he wishes; but they are so mingled."
[4] Again, a strong evidence of the intention of the bank is that they so expressly, and with exuberant verbiage, reserve liens upon all securities in their possession. “Expressio unius exclusio alterius.” Contrast the note used by the Bank of Commerce, which reserved a lien upon all the securities while in the hands of the brokers which were purchased out of the proceeds of loan. Of course, neither of these notes is conclusive, but each indicates that when the banks intended such an agreement they knew how to express it, and that in the case at' bar the defendant expressed quite clearly a lien depending upon possession. The most reasonable understanding of the relation between the parties is that the bank relied upon the good faith of the broker to pay his loan and not to use his funds improperly, but that it had occurred to no one to consider what was the position of the bank, if the brokers should fail before the loan was paid. If that occurred, it seems to me incredible that, with no practice to go by, they should have left the matter without definition. The forms of the .relation are all those of debtor and creditor. The practice under it sheds no light, as I have said; for obviously the banks could not exercise the rights of a lienor until there was some occasion to assert a preference. It seems pretty clear to me that the present as
The testimony of Carse goes a little further than the actual practice of the brokers and the bank. He in one place characterizes the relations between the two, and states what they understood the legal status to be. Thus he says on his direct examination:
“It has developed a form of trust, and the clear understanding implied between the broker and the bank is that whatever the broker obtains by the proceeds of the loan given to him is held in trust for the account of the bank. * * * if a broker pays for stocks or bonds, it is the understanding of the bank that they belong to them as colla lera! to their loan, and the broker simply retains possession of them long enough to make delivery and get payment,” etc.
Now, if this witness’ interpretation of the legal effect of the custom is to stand for the court’s, of course the master’s decision as to the meaning of the custom is wrong; for then it is an out and out trust, disappearing into an equitable lien, upon payment of the certified checks to another bank and receipt of securities in exchange. But such an interpretation is not competent evidence at all, since it in effect usurps the court’s function which is to decide what, was the “clear understanding.”
' [5] Moreover, it is of no consequence for another and deeper reason: A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain ads of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still he held, unless there were some mutual mistake, or something else of the sort. Of course, if it appear by other words, or acts, of the parties, that they attribute a peculiar meaning to such words as they use in the contract, that meaning will prevail, but only by virtue of the other words, and not because of their unexpressed intent.
[6] Now, in the case at bar, whatever was the understanding in fact of the banks, and of the brokers, too, for that matter, of the legal effect of this practice between them, it is of not the slightest consequence, unless it took form in some acts or words, which, being
[7] When, therefore, Carse says what is the clear understanding of the legal effect of the practice, it is of no consequence, since that understanding was expressed only in acts, the natural meaning of which does not imply any trust relation, as he, and perhaps they, may have supposed. Had they said that they meant to create a trust, such a trust would arise; but when they merely adopted a course of conduct, the supposed results of that conduct are immaterial. I have therefore wholly disregarded this portion of Carse’s testimony.
[8] The question of subrogation is easily disposed of. There is no subrogation, unless the money used to pay the claim kept alive by subrogation was money on which the party subrogated had in equity some claim, charge, or lien. I think there are no cases in which the payment of money in discharge of a claim allows of subrogation when the money was in all senses that of the man who paid the obligation. In other words, if the bank had some kind of equitable lien on the checks in the hands of the broker, it would certainly be entitled to be subrogated, but not if those funds were the funds of the broker in every sense. It is, of course, true that in Hurley v. Atchison, Topeka & Santa Fe Railroad, 213 U. S. 126, 29 Sup. Ct. 466, 53 L. Ed. 729, the court went a long way to sustain the equity of a claimant in bankruptcy, but I think it quite clear that the reason was this: The money which the road paid in advance for coal was the purchase price of an agreed quantity of coal, actually in existence. It was meant to give the road the right to demand from the seller a certain amount of coal actually in its possession, which, though not yet set apart from the bulk, was still definable in quantity. That was a specific interest in a res which survived bankruptcy. It hardly seems' worth while to consider Sexton v. Kessler, 172 Fed. 535, 97 C. C. A. 161, in which there was a specific agreement.
[9] This case was heard in a somewhat anomalous way, as it was referred to take the testimony and report. The master has reported, and this is, therefore, in the nature of a final hearing on the testimony. The learned master allowed himself to be persuaded to incorporate certain refusals of requests to find — a practice which has, as far as I can learn, no place in equity practice, and the very beginnings of which I hope will always be resisted by the federal courts, which may otherwise find themselves in the unhappy predicament in that respect of the state courts under the New York Code. I have wholly disregarded these findings and refusals to find. I have treated the testimony as though submitted on final hearings.
[10] This suit is in equity to recover the actual securities in specie. That is the prayer, and that was what was intended. It is quite likely that the trustee may have had the right to sue at law after rescinding
The trustee will, of course, recover costs. Should a reference be had, I should be glad to have Judge Brown again act as master, if he is willing.