Kessler & Co., of New York, engaged in the business of banking and foreign exchange, had for a long time drawn upon Kessler & Co., Ltd., of Manchester, without giving any
“We beg to refer to the question of your providing -security for the drawing credit which you have with us, which has already been privately touched upon. We understand from Mr. Edward Kessler that it would not be very convenient for you to provide this immediately, and as we in no way wish to incommode you, although from the altered circumstances of this firm it is a matter of some importance to us, we propose to give you until the 30th of June of this year, by which date the necessary securities should be set aside for us and a list sent to us. We do not propose to name a fixed amount of credit. Suffice it to say that what you are at present using seems large, and rather than an increase we should like to see it somewhat reduced.
“We trust that you may be able to give effect to our wishes even sooner than the date we stipulate for.”
In accordance with this letter the New York house, on June 30th, wrote the Manchester house:
“In accordance with instructions from Mr. Alfred Kessler, we have to-day placed in a separate package in our safe deposit vaults the following securities, package marked ‘Escrow for account of Kessler & Co., Limited, Manchester’:
1,484 shares Oklahoma Gas & Electric Co., at 25.$ 37,100
2,428 shares United Lighting & Heating Co., at 12. 29,136
2,352 shares Daimler Manufacturing Co., at 50. 117,600
“This escrow is intended as a protection against our long drawings against your good selves.”
July 8th the Manchester house replied as follows:
“We are in receipt of your favor of 30th ultimo, in which you advise us of the securities you have laid, aside as security for your long drawings on us. We have noted the particulars as given up to us and the matter goes in order. If at any time you have the opportunity of realizing these securities or any part of them, you are at liberty to take them and to replace them by others of equal value, though in that case we should of cours.e like to see rather better quality.”
December 23, 1903, the Manchester house wrote to the New York house as follows:
“For the purpose of the audit of our books for our yearly balance sheet, ■we should feel obliged if you would send us, in the form of a certificate, the particulars of the securities you have set aside against your drawing credit with us. We should like this done annually on the 31st December. We do not think the matter will present any difficulty for you. Something in the form of the inclosed is what we require. * * * We certify that we have specially set aside and hold for your aect. on this, the 31st day of December, ’03, as security for the drawing credit which you accord us, the following securities: * * * Name secs, and market value.”
The New York house not only conformed to these directions, but, in addition, entered the securities so set aside and all substitutions of them on their loan book and notified the Manchester house of substitutions made from time to time. The securities were always either negotiable by delivery or indorsed in blank. The two houses did business in strict conformity with the foregoing arrangement until the fall of 1907, when a financial panic occurred in the city of New York. October 25th the stability of the New York house being in doubt, it de-
This is an action in equity brought by the trustee in bankruptcy to set aside the transfer of the securities because made within four months prior to the filing of the petition; the New York house being insolvent, and the Manchester house knowing, -or having reason to know, that fact, and the intention being to give it a preference. .The matter was referred to a master, who found in accordance with the prayer of the bill, and his report was confirmed by the district judge, from whose decree this appeal is taken.
The master and the district judge both held the transaction in question to be a pledge or an agreement to pledge the escrow securities, and that the delivery of them under the circumstances slated in the bill within four months of the filing of the petition in bankruptcy constituted a voidable preference under the bankrupt act. It may be admitted that the conclusion so reached was entirely right if the arrangement is to be regarded as a pledge or a promise to pledge; possession being essential to the existence of a pledge. ' This relieves us from the necessity of examining authorities relating to pledges. A word, however, may be said as to the cases of Casey v. Cavaroc, 96 U. S. 467, 24 L. Ed. 779, Casey v. National Bank, 96 U. S. 492, 24 L. Ed. 789, and Casey v. Schuchardt. 96 U. S. 491, 24 L. Ed. 790, upon which the. appellant especially relies. In the second case a receipt was given by the bank which might have been treated as a declaration of trust; but the defendant relied on its rights as a pledgee. What Mr. Justice Bradleys said in the last case was undoubtedly true of all the cases:
“As the only claim made by Scliuchardt & Sons in their answer to the securities in question is by way of dlodge, and as there was no such delivery and reiontion of possession by them or their agents or trustees as the law requires fo constitute the privilege of a pledge as to third persons, their claim cannot, be sustained.”
The intention to secure is plain; hut this could have been accomplished not only by. a pledge, which is the usual course of business in case of dioses in action, but by a mortgage or by" a trust. It can hardly he doubted that a formally executed declaration of trust as to specific securities by the New York house in favor of the Manchester house would have been good. The New York house, although the maker of the trust, could have properly acted as the trustee (Locke v. Trust Co., 140 N. Y. 135, 35 N. E. 578), to the extent of the trust, viz., the protection of the Manchester house for its acceptances.
As the transaction was a perfectly honest one, a construction should be adopted to give it effect, if that is possible. In their correspondence the parlies used neither the words “mortgage,” nor “pledge,” nor “trust,” but the inapt word “escrow,” which they probably did not understand. What they did, however, clearly evidences their intention. The credit to be given to the New York house was not to depend alone upon its strength, but also upon additional security to be given to the Manchester house. The New York house, being the absolute owner
Considering the family relation and the long business dealing between the two houses, and the fact that they were dealing 3,000'miles apart, and that they had entire confidence- in each other, the arrangement made was natural and reasonable. It was sufficiently precise to protect the Manchester house and elastic enough to meet the ordinary requirements of the business of the New York house.
If the transaction had been, a mortgage of the securities, the delivery of them October 25, 1907, would have been good as against the trustee in bankruptcy because under the law of the state of New York mortgages of choses in action need not be filed. Lien Law (Laws .1897, p. 536, c. 418) § 90; Humphrey v. Tatman, 198 U. S. 91, 25 Sup. Ct. 567, 49 L. Ed. 956. Doubtless a court of equity would not intervene to enforce or perfect an imperfect mortgage as against the other creditors of the mortgagor; but no such assistance would have been needed, the mortgagor having voluntarily carried out the purpose of the mortgage by delivering the securities to the mortgagee. This would have been legal, notwithstanding the insolvency of the mortgagor and the knowledge of that fact by the mortgagee. Hauselt v. Harrison, 105 U. S. 401, 26 L. Ed. 1075; Wood v. U. S. Fidelity Co. (D. C.) 143 Fed. 424.
So in the case of trust receipts the courts of New York have been astute to carry out the intention of the parties. The course of business is as follows: A banker gives a letter of credit to the purchaser of goods to enable him to pay for them upon condition that bills of lading to the banker’s order for the goods shall be delivered to him, accompanied by a draft upon the purchaser. Upon arrival of the goods the banker delivers the bill of lading to the borrower; he executing a trust receipt to hold or sell the goods as the property of the banker for his benefit. Without defining exactly what the relation between the lender and the borrower is as to the goods — that is, whether it is that of mortgagor and mortgagee or of pledgor and pledgee, or a conditional sale — the courts have steadily protected the right of the lender in the goods so delivered. Farmers’ & Mechanics’ Bank v. Logan, 74 N. Y. 568; Moors v. Kidder, 106 N. Y. 32, 12 N. E. 818; Drexel v. Pease, 133 N. Y. 129, 30 N. E. 732.
We regard the transaction in question as a declaration of trust in respect to the escrow securities by the New York house in favor of the Manchester house. Being the absolute owner of the securities, it
We do not apprehend that this conclusion will result in the consequences foretold by the appellee. The public was not giving credit to the New York house' on the strength of its apparent ownership of these securities because it knew nothing at all about them. The visible possession of chattels apparently owned by the possessor creates a wholly different situation. In respect to such property the law prohibits secret liens as against creditors. ’ Yet ownership oí chattels where there has been no change of possession will be protected if they are set apart and marked and in this way notice given to the public. First National Bank v. Pennsylvania Trust Co., 124 Fed. 968, 60 C. C. A. 100. There was, however, as to the securities under consideration, no secrecy which was not inherent in their nature. The public does not know what stocks, bonds, or notes a merchant has, and therefore does not give him credit because of them. There is no evidence that any exhibition of or statement as to these securities was made to any one by the New York house for the purpose of obtaining credit. Their books, if examined, would have shown what the real dealing between them and the Manchester house was.
If there had been no insolvency, and the New York house had withdrawn securities without substituting others, a court of equity would have compelled it to do so, or at least would have enjoined it from making sueli withdrawals, at the suit of the Manchester house. If, having failed to cover its drafts, the New York house had refused to deliver the securities to the Manchester house, a court of equity would have compelled it to do so. In delivering the securities to the Manchester house October 25, 190!, tlie New York house acted without the compulsion of a court of equity in strict accordance with the trust it had declared four years before, when entirely solvent. For the first time in that course of dealing there was an expectation that the New York house would not cover its drafts; that the Manchester house would have to pay them and would need to realize upon the securities which the New York house held for its protection. No new right or privilege was then created voidable under the bankrupt act. The delivery of these earmarked securities was in strict pursuance of the agreement made long before on the strength of which the credit: was given. Sabin v. Camp (C. C.) 98 Fed. 974, cited with approval in Thompson v. Fairbanks, 196 U. S. 516, 524, 25 Sup. Ct. 306, 49 L. Ed. 577. A liberal construction should be given to these transactions in aid of the obvious intention of the parties.
The decree of the court below is reversed with costs.