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, or whereby
the party promises to convey or assign or transfer the property as
security, creates an equitable lien upon the property so indicated
which is enforceable against the property in the hands not only of
the original contractor, but of his heirs, administrators,
executors, voluntary assignees, and purchasers or encumbrancers
with notice.
On the facts stated in the opinion of the Court, which can with
difficulty be condensed without omitting something which might be
deemed essential, and applying to those facts the principle of law
stated in the preceding paragraph,
held that Walker &
Company had an equitable lien upon the bonds of Brown pledged to
the Union National Bank, and that those bonds had been returned to
Brown under such circumstances as to continue the lien against them
in the hands of Mrs. Brown, to whom they had been given by him.
To dedicate property to a particular purpose to provide that a
specified creditor, and that creditor alone, shall be authorized to
seek payment from it or its value, is to create an equitable lien
upon it.
For reasons stated in the opinion, interest is to be computed at
the rate of six percent, not at the rate of ten percent.
Page 165 U. S. 655
The case is stated in the opinion.
MR. JUSTICE WHITE delivered the opinion of the court.
The complainants, who are appellants here, all citizens of the
State of Illinois, members of the firm of J. H. Walker &
Company, established in the City of Chicago, filed their bill in
the Circuit Court of the United States for the Southern District of
Iowa, Central Division, against Anna L. Brown, widow of Talmadge E.
Brown, as administratrix of her deceased husband's estate, and
against Willis S. Brown and Edward L. Marsh, co-administrators, all
of whom were alleged to be citizens of the State of Iowa, and to
have been duly appointed as aforesaid by the District Court of Polk
County, Iowa.
Omitting reference to matters which have become irrelevant to
the controversy in its final aspect, the bill substantially averred
that Talmadge E. Brown, being desirous of assisting an Iowa
corporation known as the Lloyd Mercantile Company, delivered to
said company $15,000 in bonds of the City of Memphis, worth their
face value; that between May and July, 1889, Walker & Company
sold to the Lloyd Mercantile Company merchandise to a considerable
amount, on the price of which there remained due on the 1st of
August, 1889, $1,524.78; that, on or about that date, the
corporation was dissolved, and a firm composed of J. Collins Lloyd
and Copeley Lloyd was formed under the name of J. C. Lloyd &
Company for the purpose of continuing the business of the
mercantile company, the new business to be carried on at
Ellensburg, State of Washington, and that the firm assumed the
debts and liabilities of the Lloyd Mercantile Company. It was
further alleged that the firm just formed proposed to buy from
Walker & Company a considerable amount of merchandise on
credit, but that Walker &
Page 165 U. S. 656
Company declined to give this asked-for credit unless Brown
would agree that the fifteen thousand of Memphis bonds, lent by him
to the Lloyd Mercantile Company should not be withheld by Brown
from the assets of the new firm, or be returned to Brown, as long
as there remained a debt due to Walker & Company by Lloyd &
Company on account of the purchase of goods; that thereupon Brown
entered into a written agreement to the effect stated, and that, on
the faith of this written agreement, the firm of Walker &
Company had not pressed the collection of the old debt, and had
sold Lloyd & Company merchandise on credit to the value of
$12,391.61, which, added to the sum previously due and assumed by
Lloyd & Company, made the debt due to Walker & Company
$13,916.39, the whole of which sum the bill averred to be due at
the time of the commencement of the suit. The bill charged that the
intent of the parties and the legal result of the agreement made by
Brown were to cause the fifteen thousand in Memphis bonds or their
value to become a security for this debt of Walker & Company,
and that thereby there was created an equitable lien on the bonds
to the amount of the debt in favor of Walker & Company.
It was further alleged that on the 25th day of December, 1889,
the firm of Lloyd & Company became wholly insolvent, and so
remained up to the time of the filing of the bill; that, after the
making of the agreement by Brown, in order to escape the effect of
the contract, Brown induced Lloyd & Company to return to him
(Brown) the Memphis bonds, and that from the time of such return,
neither the said bonds nor the value thereof formed part of the
assets of Lloyd & Company; that Walker & Company did not
know of the return of the bonds until after the credit had been
extended to Lloyd & Company. It was alleged that complainants
did not know the true condition of the estate of Brown, or whether
the Memphis bonds were yet among its assets, and that a discovery
and accounting was necessary in order to enable them to reach the
property upon which the lien was asserted to exist or the proceeds
thereof in the hands of the administrators.
The relief prayed was that if, on discovery, it be found
that
Page 165 U. S. 657
the Memphis bonds, or any portion thereof, were a part of the
assets of the estate of Brown, an equitable lien be recognized
thereon and the bonds be ordered to be sold, and the proceeds
applied, as far as necessary, to the payment of the debt due by
Lloyd & Company to the complainants; that if the Memphis bonds
had been sold or exchanged by Brown for other properties which
could be traced to the hands of the administrators, a like lien
might be adjudged thereon; that if the bonds, or any part thereof,
did not form a part of the estate of Brown in the hands of his
administrators, the complainants might be adjudged to be creditors
of the estate for the amount of the value of the bonds to the
extent necessary to pay their debt, and that the administrators be
ordered to pay this sum in due course of administration, and be
ordered to render, under the supervision of the court, an account
of all properties received by them as administrators, and of all
their acts and doings as such. There was a prayer for an injunction
restraining the disposing or incumbering of the Memphis bonds
referred to, or the proceeds thereof, in the hands of the
administrators. In addition to this claim, there was an averment as
to a debt due by Brown's estate for $560.14, asserted to have been
expended in an endeavor to collect the debt due by Lloyd &
Company, and for which it was alleged Brown had agreed to be
responsible.
The answer, insofar as it relates to the matters above stated,
averred that about February, 1889, the Lloyd Mercantile Company,
being in need of money, induced Brown, the deceased, to loan
fifteen one thousand dollar bonds of the City of Memphis, to be
used as collateral security for a loan which the company was then
about to make; that the company received the bonds and used them by
pledging them to secure the debt -- all of which facts were known
to the complainants; that this transaction with the company was the
only one the deceased had with it on the subject of the Memphis
bonds. The answer specifically denied that the bonds of the City of
Memphis thus loaned to the mercantile company were at any time an
asset of said company, and also expressly denied that the bonds
were ever loaned to the mercantile company or
Page 165 U. S. 658
to Lloyd & Company, its successor, for any other than the
express purpose above stated -- that is, to be used as collateral
back of the particular loan referred to. Denying all knowledge of
the existence of the alleged debt in favor of Walker & Company,
it was averred that no other contract or agreement on the subject
of the bonds was made by Brown with Walker & Company except
such contract as might result from the terms of a letter on the
subject of the Memphis bonds, dated Chicago, December 21, 1889,
written by Brown to Walker & Company, which letter was set out
in the answer.
After denying that the credit given to Walker & Company was
extended to Lloyd & Company on the faith of the bonds, and
after charging that the bonds were at the time of the writing of
the letter held as collateral back of a loan of the Union National
Bank of Chicago, and that no equitable lien thereon resulted from
the writing of the letter by Brown, the answer in addition averred
that after the writing of the letter, to-wit, some time during the
month of November, 1889, the bank, in whose hands the Memphis bonds
of Brown had been deposited as collateral for Lloyd & Company's
debt, pressed for payment of the principal obligation and
threatened in default to sell the bonds; that Brown thereupon, in
order to prevent the sale of his bonds, paid the debt with his own
funds and withdrew the bonds, and that thus he had been discharged
of his obligations under the terms of the letter referred to, if
any obligations thereby arose; that no part of the money which made
this payment was that of Lloyd & Company or was taken from the
assets of the firm, but the payment was made wholly and exclusively
with the money of Brown in order to prevent the sale of his bonds.
It was also charged in the answer that if any debt existed in favor
of Walker & Company, it was extinguished, this being predicated
on a recital of the following facts: that on the failure of J. C.
Lloyd & Company, in December, 1889, Walker & Company had
taken a chattel mortgage on the stock of goods of the firm at
Ellensburg, Washington, to secure the payment of their debt, and
had entered with other creditors having a like mortgage into
Page 165 U. S. 659
possession of the stock of goods, which largely exceeded the
value of the mortgages resting upon it; that thereafter creditors
of Lloyd & Company had levied upon the stock, and had actually
disturbed, or threatened to disturb, the possession of the
mortgages; that the mortgagees then acquired the rights of certain
of these creditors who had levied upon the stock, and had then,
under process issued in the name of the creditors, sold and bought
in the equity of the creditors in the stock, and subsequently,
without any foreclosure of their mortgages, taken entire charge of
the stock and disposed of it at private sale. These facts, the bill
averred, had, under the laws of Washington, operated to extinguish
the claim of the mortgage creditors.
The answer, moreover, admitted that at the time of Brown's
death,
"there were fifteen one thousand dollar bonds of the City of
Memphis in his possession as his property, and that the same
passed, with his other estate, into the hands of his administrators
as part of his said estate. But this respondent avers that the
bonds were, prior to the death of Brown, given by him as a gift to
his wife, Anna L. Brown, who now holds and owns the same."
Replication to the answer was filed on the 5th of March,
1892.
The issues as to the main controversy presented by these
pleadings were therefore clearly as follows: an assertion on the
part of complainants that they had extended credit upon their old
debt due by the Lloyd Mercantile Company, and assumed by Lloyd
& Company, and had given further credit to the new firm of
Lloyd & Company, by selling merchandise to it on the faith of
an agreement by Brown that his Memphis bonds should be a security
for the debt, and that this agreement was evidenced by a written
contract on the part of Brown, the result of which was to create an
equitable lien upon the bonds or the value thereof; that Brown had
unlawfully withdrawn the bonds, and that the lien was therefore
operative upon the bonds in his possession or upon their proceeds
if he had disposed of them, and if the proceeds could be traced to
his estate, and, if not, that the estate was liable for the debt. A
denial on the part of the defendants that
Page 165 U. S. 660
there was any contract but the letter above referred to, the
terms of which, it was asserted, did not give rise to a lien upon
the bonds or their value, which was followed by the allegation that
all Brown's obligations under the contract, if any arose from it,
had been extinguished by his being compelled to pay, in order to
prevent the sale of the bonds, solely from his own money, the debt
for which the bonds were pledged, the further defense being an
assertion that the claim of Walker & Company against Lloyd
& Company was extinguished in consequence of the acts in
relation to the mortgage subsequently taken, referred to in the
answer.
In support of these various issues, both parties took testimony,
under commissions, the last deposition having been opened on
October 18, 1892. When all the testimony had been taken and its
result was known to the parties, on November 14, 1892, the
complainants, by leave of court, amended their bill by averments
charging that the Memphis bonds referred to were in the possession
of Mrs. Anna L. Brown, she having received them as a gift from
Talmadge E. Brown, and praying the recognition of an equitable lien
on the bonds in her hands. The defendants amended their answer by
additional averments concerning the conduct of Walker & Company
in relation to the mortgage taken to secure their debt. The amended
answer besides averred that
"the said T. E. Brown, deceased, contributed in value to the
said J. C. Lloyd & Company and their funds and assets the full
sum or value of fifteen thousand ($15,000) dollars, being the
actual value of the Memphis bonds loaned to said J. C. Lloyd &
Company, and that the estate of T. E. Brown, through these
defendants, likewise contributed more largely in amount than the
value of said Memphis bonds to the assets and to the payment of the
indebtedness of J. C. Lloyd & Company."
The result of these amendments was that the complainants,
finding the bonds in the possession of Mrs. Brown under a gift from
her husband, elected to proceed against her for the enforcement of
the equitable lien which they asserted, and the defendants added a
new ground to their original defense by asserting not that the
bonds had been returned to Brown
Page 165 U. S. 661
in consequence of the payment by him of the debt for which they
had been pledged, but that Brown and his estate had contributed
more than the value of the bonds to the payment of the debts of
Lloyd & Company. The circuit court, finding that the contract
between Walker & Company and Brown created no equitable lien on
the bonds, but only an ordinary contract relation, concluded that
the remedy of the complainants was not within the cognizance of a
court of equity, and therefore dismissed the bill, reserving the
right of Walker & Company to seek relief against the estate of
Brown in an action at law. 58 F. 23. The Circuit Court of Appeals
for the Eighth Circuit, to which court the case was taken on
appeal, rested its decree of affirmance upon substantially the same
grounds. 63 F. 204. A writ of certiorari was allowed, and the
record has been brought here for review.
The following facts are established by the proof:
In 1888, J. C. Lloyd and Copeley Lloyd were engaged in business
at Des Moines, Iowa. T. E. Brown was also a resident of Des Moines,
and a man of large fortune. His adopted or foster daughter was the
wife of J. C. Lloyd. In February, 1889, J. C. Lloyd and Copeley
Lloyd organized a corporation under the laws of Iowa called the
Lloyd Mercantile Company, and this company, either with the stock
of goods purchased in its own name after its organization or with a
stock which had been purchased previously by J. C. and Copeley
Lloyd and by them transferred to the corporation, commenced
business in March, 1889, at Tacoma, Washington Territory. In May,
1889, part of the stock of merchandise of the company was moved to
Ellensburg, Washington Territory, where a store was opened in the
name of the corporation, and the remainder of the stock was taken
to Davenport, in the same territory, where a branch store was also
opened. Between July and the 1st of August, 1889, J. C. Lloyd and
Copeley Lloyd issued a circular announcing the formation of a
commercial firm under the name of J. C. Lloyd & Company, which,
it was stated, had assumed all the debts of the Lloyd Mercantile
Company. In the autumn of 1888, preceding the formation of the
mercantile company, the Lloyds bought from the firm of Clement,
Bain
Page 165 U. S. 662
& Company merchandise to the extent of $50,000, part of
which was paid for in money and the balance evidenced by notes. In
February, 1889, there were outstanding and unpaid notes, thus given
for the purchase price of the merchandise bought from Clement, Bain
& Company, to the amount of $15,000. Upon these notes T. E.
Brown was the endorser or surety. The makers of the notes being
unable to pay them, Brown handed to Lloyd fifteen bonds, of the
denomination of one thousand dollars each, of the City of Memphis,
for the express and only purpose of enabling Lloyd to use the bonds
as collateral security for a loan to be procured with which to pay
the outstanding notes upon which he (Brown) was surety. Lloyd
called upon the firm of James H. Walker & Company, of Chicago,
to assist him in obtaining this loan. Mason, a confidential
employee managing the credits of Walker & Company, cooperated
with Lloyd in his effort to borrow money on the security of the
bonds of Brown. The Union National Bank of Chicago, whose president
was a member of the firm of Walker & Company, lent Lloyd the
money, and the fifteen Memphis bonds were pledged as collateral for
this loan. Subsequently, from May to July, 1889, Walker &
Company sold and shipped to the Lloyd Mercantile Company a very
considerable amount of merchandise; and at the time of the
dissolution of the corporation and the formation of the firm, the
Lloyd Mercantile Company owed Walker & Company a balance of
account to the extent of $1,524.78. During the course of these
dealings, the note which had been given by Lloyd to the Union Bank,
supported by the Memphis bonds as collateral reached maturity, and,
through the friendly cooperation of Walker & Company, the bank
which held it at the request of Lloyd, extended the term for its
payment. After the formation of the partnership of Lloyd &
Company, Lloyd desired to purchase on credit a large amount of
goods from Walker & Company, and furnished, on being called
upon, a statement of the condition of the firm. This statement
indicated the solvency of the firm, but contained no mention of a
claim in favor of Brown resulting from the Memphis bond
transaction. Upon inquiry's being addressed by Mason to Lloyd on
the subject,
Page 165 U. S. 663
he declared that he had not included in his statement a debt in
favor of Brown growing out of the lending of the Memphis bonds
because it was a mere friendly arrangement between himself and
Brown, and "he did not regard it exactly as a debt." Mason
thereupon made a memorandum on the bottom of the statement as
follows:
"In addition to above liability, owe Mr. T. E. Brown, Des
Moines, Ia., $15,000, payable at our convenience. This is in the
City of Memphis, Tenn. bonds, now hypothecated Union National Bank
for loan equal in amount."
Mason thereupon informed Lloyd "that those bonds, or the
proceeds of those bonds, were not to be returned or paid to Mr.
Brown until our debt is paid," and Lloyd requested Mason to dictate
such a letter as he might wish Brown to sign, and it would be
signed. Mason then dictated a letter, which is the one referred to
in the bill of complaint as evidencing the contract, and which, as
already stated, was set out in full in the answer:
"Chicago, Sept. 21st, 1889"
"Messrs. James H. Walker & Company, Chicago, Ill."
"Gentlemen: I beg to advise you that the loan of fifteen
thousand dollars, Memphis bonds, made by me to Mr. J. C. Lloyd, for
the use of Messrs. Lloyd & Company, Ellensburg, Wash. Ter., is
with the understanding that any indebtedness that they may be owing
you at any time shall be paid before the return to me of these
bonds, or the value thereof, and that these bonds or the value
thereof are at the risk of the business of Lloyd & Company so
far as any claim you may have against said Lloyd & Company is
concerned."
"Yours truly,"
"T. E. Brown"
Pending the sending of this letter by Lloyd to Brown and its
return to Walker & Company with the signature of Brown affixed
to it, the goods which had been ordered by Lloyd were prepared for
shipment, but were retained, and were only shipped on the receipt
of the letter. Subsequently, in December, 1889, Lloyd & Company
became insolvent, and the debt to Walker & Company, amounting
to $13,916.39, 916.39, remains unpaid.
Page 165 U. S. 664
The questions which first require solution are: did the
agreement embodied in the letter create an equitable lien in favor
of Walker & Company upon the bonds of Brown pledged to the
Union National Bank? And if so, were they returned to Brown under
such circumstances as to cause the lien, if any existed, to be
operative against the bonds in the hands of Mrs. Brown, who holds
them under a gift from Brown and therefore subject to such lien if
any attached to them in the hands of Brown? Before considering the
contract itself and the issue of fact which arises, it is necessary
to fix the legal principles by which the question of equitable lien
is to be determined. It is clear that if the express intention of
the parties was to create an equitable lien upon the bonds or the
value thereof, or if such intention arises by a necessary
implication from the terms of the agreement, construed with
reference to the situation of the parties at the time of the
contract, and by the attendant circumstances, such equitable lien
will be enforced by a court of equity against the bonds in the
hands of Brown or against third persons who are volunteers or have
notice. It is well settled, said the court in
Pinch v.
Anthony, 8 Allen 536,
"that a party may, by express agreement, create a charge or
claim in the nature of a lien on real as well as on personal
property of which he is the owner or in possession, and that equity
will establish and enforce such charge or claim not only against
the party who stipulated to give it, but also against third persons
who are either volunteers or who take the estate on which the lien
is agreed to be given with notice of the stipulation."
The subject was very fully reviewed with reference to the
English and American authorities in
Ketchum v. St. Louis,
101 U. S. 306,
where the language just cited was approved, and that ruling was
considered and reaffirmed, during this term, in
Fourth Street
Bank v. Yardley, 165 U. S. 634.
Pomeroy, in his work on Equity Jurisprudence (vol. 3, par. 1235),
condenses and states the general result of the authorities on the
subject as follows:
"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
Page 165 U. S. 665
some particular property, real or personal, or fund, therein
described or identified, a security for a debt or other obligation,
or whereby the party promises to convey or assign or transfer the
property as security, creates an equitable lien upon the property
so indicated which is enforceable against the property in the hands
not only of the original contractor, but of his heirs,
administrators, executors, voluntary assignees, and purchasers or
encumbrancers with notice. . . . The ultimate grounds and motives
of this doctrine are explained in the preceding section, but the
doctrine itself is clearly an application of the maxim, 'Equity
regards as done that which ought to be done.'"
The words of the contract, embodied in the letter, are as
follows:
"I beg to advise you that the loan of fifteen thousand dollars,
Memphis bonds, made by me for the use of Messrs. Lloyd &
Company, Ellensburg, is with the understanding that any
indebtedness that they may be owing to you at any time shall be
paid before the return to me of these bonds or the value thereof,
and that these bonds or the value thereof are at the risk of the
business of Lloyd & Company so far as any claim you may have
against said Lloyd & Company is concerned."
This language certainly designates the bonds or the value
thereof as a security for the debt to Walker & Company. It says
that the bonds belonging to Brown shall not be returned to him so
long as the debt to Walker is unpaid. It thus provides for the
keeping in the hands of Lloyd & Company of the bonds until the
debt of Walker is discharged. Having stipulated for retaining the
bonds as long as Walker's debt existed, the agreement proceeds to
dedicate the property thus retained exclusively to the payment of
Walker's debt, for it says not that the property so held shall
become an asset of the firm, not that it shall be liable to the
general creditors of Lloyd & Company, but that the bonds or the
value thereof are to remain at the risk of the business of Lloyd
& Company "so far as any claim that you [Walder & Company]
may have." To construe the contract as making the bonds a mere
general asset of the firm would not only eliminate the words
"insofar
Page 165 U. S. 666
as you [Walker & Company] are concerned," but would operate
an injustice to Brown by presupposing that he had given up his
property for the general purposes of the firm of Lloyd &
Company when, on the contrary, in express language, the contract
provides that only one creditor of Lloyd & Company, to-wit,
Walker & Company, should exercise recourse on the bonds. To
dedicate property to a particular purpose, to provide that a
specified creditor, and that creditor alone, shall be authorized to
seek payment of his debt from the property or its value, is
unmistakably to create an equitable lien.
Nor does the fact that the letter provides that these bonds or
the value thereof shall be "at the risk of the business of Lloyd
& Company" change the manifest significance of the contract,
for these words are followed by the qualifying language "so far as
any claim you may have against Lloyd & Company is concerned."
The bonds were at the risk of the business in a two-fold sense --
viz., the debt of Walker and the sum for which they were
pledged. Manifestly the dedication of Brown's bonds to the
particular and special payment of Walker's debt, a debt due by the
business of Lloyd & Company, left the bonds, as a necessary
consequence of the equitable lien which the contract created, at
the risk of the business -- that is to say, if the business did not
pay the debt which it owed to Walker & Company, the bonds or
their value were submitted to the risk of such nonpayment, and
therefore subject to the equitable lien, if the risk of the
business made it necessary for Walker & Company to exercise the
lien which the contract gave that firm. The contention that the
words "at the risk of the business" indicates that the parties to
the contract did not intend a lien on the bonds, since that
provision submitted the bonds to the entire risk of the business of
Lloyd & Company for every purpose, and therefore authorized
that firm, if they recovered possession of them, to use them for
any other debt which they might owe or to sell them and apply the
proceeds to their business generally, is unsound, since it entirely
overlooks the express averment of the answer that the bonds were
lent by Brown to Lloyd & Company for one purpose alone -- that
is, to be used
Page 165 U. S. 667
as collateral for a particular debt and none other. The
existence of this debt at the time the letter was written is also
averred in the answer, and this fact additionally elucidates not
only the meaning of the words "at the risk of the business," but
also the stipulation that the bonds "or their value" should be at
such risk. The loan for which the bonds had been placed as security
was a debt of Lloyd & Company. The ability of Lloyd &
Company to pay this debt was a risk upon which the coming back of
the bonds into the possession of Lloyd & Company depended. The
contract, considering the possibility of the payment of the debt by
Lloyd & Company and the arising therefore of the right of that
firm to retake possession of the bonds, stipulates for their
nonreturn in that event to Brown. On the other hand, considering
that the firm of Lloyd & Company might be unable to pay the
debt, and therefore fail to recover possession of the bonds, the
contract provides that the claim in favor of Brown for the value of
his bonds, lost by the failure of the firm to pay the debt for
which they were pledged, should not be preferred against the assets
of Lloyd & Company, to the detriment of Walker's claim. Now the
restriction placed on Brown as to the nonexercise of his claim for
the value, in consequence of the risk to which the bonds were
subjected from the outstanding pledge, cannot destroy the express
provision against the return of the bonds to Brown in the event
that the risk of the business did not prevent their coming back
into the possession of Lloyd & Company
Equally without force is the assertion that, inasmuch as the
face value of the bonds was $15,000 and the debt for which they
were then pledged was $15,000, therefore the parties could not have
contemplated the coming back of the bonds into the possession of
Lloyd & Company and their return to Brown. This argument, if
accepted, would read out of the contract its express language
providing against the return to Brown in the contingency stated. Of
course, the lien in favor of Walker & Company was subordinate
to the prior and outstanding claim resulting from the pledge, but
the obvious purpose of the contract, while considering that fact,
was to
Page 165 U. S. 668
give to Walker & Company the benefit of the bonds as a
security for their claim in the event Lloyd & Company
discharged the debt for which they were pledged from their assets,
and thereby became entitled to the possession of the bonds. This
construction of the contract and of the rights of the parties under
it was that entertained when the answer was filed, and before the
proof had been taken, since the answer expressly asserts that the
pledged debt had not been paid by Lloyd & Company, but was made
solely from the assets of Brown, in order to prevent the sale of
the bonds, and therefore his obligation under the contract had been
discharged. The subsequent amendment to the answer, which gave a
different view of the contract, was made after the coming in of the
proof, which demonstrated the fact, as we shall hereafter see, to
be that the payment of the debt had not been made by Brown, but by
Lloyd & Company. If there be ambiguity in the contract, resort
may be had to the situation of the parties and the circumstances
under which it was entered into for the purpose not of changing the
writing, but of furnishing light by which to ascertain its actual
significance.
Runkle v. Burnham, 153
U. S. 224.
Resorting to these means, the purpose of the parties to create a
lien upon the bonds or their value is clearly manifest. At the time
the contract was entered into, the bonds were held as collateral
security for a loan obtained by Lloyd to pay off a debt, for which
Brown was bound, contracted for the purchase price of merchandise.
The proof conclusively sustains the averments of the answer that
the bonds had been given by Brown not for the general purpose of
the business of Lloyd & Company, but exclusively to enable that
firm to pay this particular debt. This refutes the theory that the
bonds were in the hands of Lloyd & Company for every purpose,
and suggests the intention of the parties that on the payment of
the old debt by Lloyd & Company for the purchase of goods for
which the bonds were pledged, they should occupy the same relation
to the new debt for the same purpose which was about to be created.
Nor is there force in the argument that the statement made by Mason
to Lloyd &
Page 165 U. S. 669
Company preceding the writing of the letter conclusively shows
that Walker & Company did not contemplate a lien upon the
bonds, and therefore that the letter embodying the contract which
they exacted before giving the credit must be held not to have
given rise to the lien. This suggestion is predicated upon the fact
that in the conversation the words "or proceeds" of the bonds were
used by Mason. But the contract contains no such words. It
stipulates against the return of the bonds to Brown and against the
use by Brown of his claim against the assets for the value of the
bonds. The use by Mason of the word "proceeds" cannot be held to
obliterate the written contract, and if resort is to be had to the
attendant circumstances, it must be so had not to a particular word
used in a conversation, but the whole of the situation must be
considered. If this is done, it becomes clear that, as Walker &
Company were familiar with the transaction by which the bonds had
been delivered to Lloyd & Company by Brown for the purpose of
being used as collateral for a particular debt, which was confirmed
by the statement made to them by Lloyd at the time of the
transaction, we cannot presume that they treated with Lloyd as
having other power over the bonds than the limited purpose for
which Brown had loaned them. From these considerations we conclude
that the contract provided for a lien upon the bonds to secure
Walker's debt subordinate to the then-outstanding lien resulting
from the existing pledge, and stipulated against a return of the
bonds in the event of the payment of the debt by Lloyd &
Company, and imposed upon Brown the obligation not to assert,
quoad the debt of Walker & Company, a claim against
the assets of Lloyd & Company, for the value in the event the
risk of the business (the outstanding pledge) prevented the return
of the bonds to the possession of Lloyd & Company
The question, then, arises were the bonds absorbed by the risk
of the business, or were they, on the contrary, returned to Brown
in violation of the contract, and subject to the equitable lien
which the contract created to secure the payment of the debt due
Walker & Company? Shortly after the making of the contract --
that is, on October 26 and 29,
Page 165 U. S. 670
1889,-two payments, one for $7,300, and the other for $2,700,
were made on account of the debt due the Union National Bank for
which the bonds were held as collateral. When these two payments,
aggregating $10,000, were made, ten of the Memphis bonds were
delivered by the bank to Lloyd, and by him returned to Brown.
Subsequently, on December 17, 1889, the balance of the debt,
$5,000, was paid to the bank, and the remainder of the bonds was
also returned to Brown. As to the source whence the money wherewith
the payment of October 26th of $7,300 was made, the testimony of
Lloyd is, to speak mildly, of an evasive character. The proof,
however, conclusively establishes that this payment was made as
follows: Lloyd and Brown called at the Polk County Savings Bank, of
Des Moines, Iowa, and a loan was asked, in the name of Lloyd, for
$7,500, and a 90-day note for that amount was drawn by Lloyd to the
order of the bank. This note, after being endorsed by Brown, was
discounted by the savings bank, the bank giving for the net amount
of the discount a draft on New York, which was used to make the
payment to the Union National Bank. The payment of October 29th of
$2,700 is, by the uncontradicted testimony, shown to have been made
solely from the assets of Lloyd & Company. The payment on
December 17th of the $5,000 was made in this way: Brown drew two
drafts, for $2,500 each, on Lloyd & Company at Ellensburg, to
the order of the Iowa National Bank of Des Moines, and these drafts
were discounted by that bank, and the proceeds put to Brown's
credit on account. He then purchased a draft to the order of the
Union National Bank for $5,000, giving his check on his own bank
account in payment of the draft. The draft so purchased was used
for the payment of the balance due the Union National Bank, by
which final payment the release of the remainder of the bonds was
accomplished. The two drafts drawn by Brown on Lloyd & Company
were forwarded by the Iowa bank to Ellensburg for collection. One
of them was paid in full from the assets of Lloyd & Company
before their failure. The other remained unpaid at the date of the
failure, and was treated by Brown as a liability of the firm, and
was used for the purpose
Page 165 U. S. 671
of absorbing its assets in the manner to be hereafter stated. On
the drawing of these drafts, Brown credited Lloyd & Company on
account with the amount thereof, and against this credit he debited
Lloyd & Company with the $5,000 which he paid for account of
Lloyd for the final payment on the note due the Union National
Bank.
Near the middle of December, 1889, Brown was in Ellensburg, and
on the 26th of December, at the instigation of Brown, a chattel
mortgage upon the stock of goods of J. C. Lloyd & Company was
executed in favor of the Iowa National Bank of Des Moines, for
$17,500, and on the same day a mortgage second in rank, also at the
instigation and request of Brown, was executed by the firm in favor
of the Polk County Savings Bank for $7,500. Included in the amount
of the debt secured by the mortgage to the Polk County Savings Bank
were the notes for $7,500 given by Lloyd, and endorsed by Brown,
from the proceeds of which the first payment of $7,300 was made.
Included in the debt of the Iowa National Bank for which the
mortgage was given was the draft for $2,500, which, as has been
already stated, was not paid at that date by Lloyd & Company.
The balance of the debt in favor of the Iowa National Bank
represented renewal notes of Lloyd, endorsed by Brown, which were
held by the Iowa National Bank, the original notes having been
prior in date to the formation of Lloyd & Company
The proof leaves no doubt that the execution of these mortgages
was brought about by Brown, who thus sought to secure the stock of
goods of Lloyd & Company for the purpose of paying the debts
for which he asserted himself to be indirectly liable. Indeed, as
to the mortgage taken in favor of the Iowa National Bank, the
unchallenged proof is that Brown acted, in procuring the mortgage,
without reference to or instructions from the bank, but solely in
his own interest. Having thus obtained the two mortgages upon the
stock of goods, he proceeded, by way of procuring a mortgage on
real estate of Lloyd, of assignments of a leasehold held by him or
his firm, assignment of a mortgage claim existing in favor of Lloyd
& Company, and by receipt of $7,600 in cash procured by
Page 165 U. S. 672
Lloyd by mortgage upon real estate, to make himself master of
the situation, so as to apply practically all the property of Lloyd
& Company and Lloyd individually to the payment of debts
claimed to be due him by Lloyd & Company, including those debts
for which he was contingently liable. Having thus secured, to the
utmost, all his claims against Lloyd & Company, by treating the
debts upon which he was contingently liable as the debts of Lloyd
& Company, a chattel mortgage, inferior in rank to those taken
in the name of others, was executed in favor of Walker &
Company for a part of the debt due them, and they were advised by
telegram of the fact. The failure of Lloyd & Company at once
followed these occurrences. Attachments were sued out by many
general creditors, and the business was wrecked. Without going into
details as to the result of the mortgages and attachments, it
suffices to say that nothing was paid on account of Walker &
Company's debt.
The contention that $9,800 of the money paid on account of the
debt of the Union National Bank for $15,000 must be considered as
solely made by Brown is without merit. This claim is based on the
fact that the notes for $7,500, which were discounted by the Polk
County Savings Bank, and from which discount the money was derived
to make the payment of $7,300, were endorsed by Brown, and upon the
further fact that one of the two drafts, of $2,500 each, which were
drawn upon Lloyd & Company to make up the $5,000, and which was
discounted by the Iowa National Bank, was drawn by Brown. The notes
and the draft were primarily obligations of Lloyd & Company.
The contract between Brown and Walker & Company from which the
lien on the bonds arose forbade the return of the bonds, and,
besides, stipulated, in the event of their being lost by the risk
of the business, that the claim for their value, in favor of Brown,
as against Lloyd & Company, should not be urged until the
payment of the debt of Walker & Company. It would be against
the most elementary rules of good conscience and of fair dealing to
allow Brown to treat the payment of the debt as having been made by
Lloyd & Company, and therefore to enforce, against the
Page 165 U. S. 673
assets of that firm, the entire claim, to the detriment of
Walker & Company, and at the same time to allow Brown to defeat
the lien on the bonds upon the contrary hypothesis that the entire
payment had been made by him (Brown), and not by Lloyd &
Company. No court of conscience can permit Brown to speculate on
his chances of securing himself for all his claims by defeating the
lien of Walker & Company, on the one hand, and then, on the
other, to allow him to assume a conflicting attitude in order to
destroy the lien. Having asserted the claims as debts of Lloyd
& Company, having sought to absorb the assets on this theory,
Brown is concluded by his conduct.
The claim set up in the amended answer that, because Brown had
other debts of Lloyd & Company which are unpaid, therefore he
had contributed to the amount of $15,000 to the assets of Lloyd
& Company, and thus performed his contract, is as wanting in
equity as the contention which we have just considered. It is far
from clear from the record whether these asserted debts have not
really been paid or secured, but, if they have not, the stipulation
of the contract which forbade the return of the bonds was for the
benefit of Walker & Company, not for that of all the creditors
of Lloyd & Company Having dedicated the bonds belonging to him
to the payment of the debt, Brown cannot be heard to make an
exception in favor of claims held by himself, if any such then
existed or thereafter arose, so as to destroy the security created
by him in favor of Walker & Company, and upon the faith of
which they contracted. If there were debts due Brown by Lloyd &
Company, they were as completely excluded from interfering with the
lien of Walker & Company upon the bonds as if they had been
held by third persons.
The contention that the debt of Walker & Company was
extinguished from the fact that, after having accepted the mortgage
security for a part of their debt, they united with other mortgage
creditors in buying the rights of certain attaching creditors, and
thereafter sold the stock of goods without foreclosure, is fully
answered by the statement that there is no proof whatever of any
agreement that the taking
Page 165 U. S. 674
of security should extinguish the original claim, and the proof
is also clear that the acts of Walker as to the purchase of the
rights of the attaching creditors, and the subsequent dealings with
the property, were upon the express understanding with Brown that
these transactions should in no way impair the rights of Walker
& Company under the contract which we have considered.
The asserted right of Walker & Company to enforce against
the estate of Brown a claim for $560.14, averred to have been
expended in as effort to collect the debt due by Lloyd &
Company upon an alleged agreement of Brown to repay the same, was
not pressed at the hearing, and we do not therefore determine
whether the sum was really due, and whether, if due, it is
enforceable in a court of equity.
There was a claim made in the discussion at bar that the
interest on the portion of the debt due Walker & Company, which
was embraced within the mortgage executed in Washington, bears ten
percent interest, and therefore should be allowed at that rate. But
this claim overlooks the fact that the bill is founded upon the
general account due Walker & Company, and not upon the mortgage
executed in Washington, which represented only a part of the debt.
Besides, the account due by Lloyd & Company to Walker &
Company, taken from the books of the latter firm, was offered in
evidence on the trial, and there is therein made only a charge of
six percent interest, computed to a short time before the filing of
the bill. This is conclusive against the claim of interest at the
rate of ten percent. There is also a reference in the record to
several interest coupons collected on the Memphis bonds by Brown
prior to his death and subsequent to the unlawful return of the
bonds to him, but the averments of the bill, taken in connection
with the amendment electing to assert the lien against the bonds in
the hands of Mrs. Brown, as they were when received from her
husband, preclude any questions which might otherwise arise on this
subject.
As the Memphis bonds are admittedly in the hands of Mrs. Brown
as a gift from her husband, the enforcement of the
Page 165 U. S. 675
lien thereon presents no question as to the jurisdiction of a
court of equity over the estate of a decedent.
It follows from the foregoing that the court below erred in
refusing to recognize the claim of the complainants, and to enforce
in their favor a lien on the Memphis bonds in the hands of Mrs.
Brown, and, for the errors in these particulars, the decree must
be
Reversed, and the case remanded to the trial court for
further proceedings not inconsistent with this opinion.