1. By the law of New York, a transfer of property, as security
for a debt, which reserves to the transferor the right to dispose
of the property or to apply its proceeds for his own uses is
fraudulent and void as to creditors. P.
268 U. S.
360.
2. This rule applies to the assignment of present and future
book accounts as well as to assignment of chattels, since it does
not result from the retention of ostensible ownership by the
assignor, but from the fact that the reservation of dominion by him
is inconsistent with the effective disposition of title and
creation of a lien. P.
268 U. S.
361.
3.
Held that an assignment made by a mercantile
corporation, more than four months before it was adjudged bankrupt,
of its present and future accounts receivable as security for a
loan was void under the above rule, so that delivery of a list of
accounts, and payments made within the four months, were
inoperative to perfect a
Page 268 U. S. 354
lien in the assignee, but were unlawful preferences, under the
Bankruptcy Act. P.
268 U. S.
364.
282 F. 12 reversed.
Certiorari to a judgment of the circuit court of appeals which
affirmed an order of the district court requiring a receiver and
trustee in bankruptcy to pay over money collected from accounts
receivable to a creditor of the bankrupt claiming them as security
under an assignment, and denying the trustee's petition that the
creditor be required to pay over collections made by him under the
assignment.
Page 268 U. S. 357
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
The Hub Carpet Company was adjudicated bankrupt by the Federal
Court for Southern New York in involuntary proceedings commenced
September 26, 1921. Benedict, who was appointed receiver and later
trustee, collected the book accounts of the company. Ratner filed
in that court a petition in equity praying that the amounts so
collected be paid over to him. He claimed them under a writing
given May 23, 1921 -- four months and three days before the
commencement of the bankruptcy proceedings. By it, the company
purported to assign to him, as collateral for certain loans, all
accounts present and future. Those collected by the receiver were,
so far as
Page 268 U. S. 358
appears, all accounts which had arisen after the date of the
assignment, and were enumerated in the monthly list of accounts
outstanding which was delivered to Ratner September 23. Benedict
resisted the petition on the ground that the original assignment
was void under the law of New York as a fraudulent conveyance;
that, for this reason, the delivery of the September list of
accounts was inoperative to perfect a lien in Ratner, and that it
was a preference under the Bankruptcy Act. He also filed a
cross-petition in which he asked that Ratner be ordered to pay to
the estate the proceeds of certain collections which had been made
by the company after September 17 and turned over to Ratner
pursuant to his request made on that day. The company was then
insolvent, and Ratner had reason to believe it to be so. These
accounts also had apparently been acquired by the company after the
date of the original assignment.
The district judge decided both petitions in Ratner's favor. He
ruled that the assignment executed in May was not fraudulent in
law; that it created an equity in the future acquired accounts;
that, because of this equity, Ratner was entitled to retain, as
against the bankrupt's estate, the proceeds of the accounts which
had been collected by the company in September and turned over to
him; that, by delivery of the list of the accounts outstanding on
September, 23, this equity in them had ripened into a perfect title
to the remaining accounts, and that the title so perfected was good
as against the supervening bankruptcy. Accordingly, the district
court ordered that, to the extent of the balance remaining unpaid
on his loans, there be paid Ratner all collections made from
accounts enumerated in any of the lists delivered to Ratner, and
that the cross-petition of Benedict be denied. There was no finding
of fraud in fact. On appeal, the circuit court of appeals affirmed
the order. 282 F. 12. A writ of certiorari was granted by this
Court. 259 U.S. 579.
Page 268 U. S. 359
The rights of the parties depend primarily upon the law of New
York.
Hiscock v. Varick Bank of N.Y., 206 U. S.
28. It may be assumed that, unless the arrangement of
May 23 was void because fraudulent in law, the original assignment
of the future acquired accounts became operative under the state
law, both as to those paid over to Ratner before the bankruptcy
proceedings and as to those collected by the receiver, [
Footnote 1] and that the assignment
will be deemed to have taken effect as of May 23.
Sexton v.
Kessler, 225 U. S. 90,
225 U. S. 99. That
being so, it is clear that, if the original assignment was a valid
one under the law of New York, the Bankruptcy Act did not
invalidate the subsequent dealings of the parties.
Thompson v.
Fairbanks, 196 U. S. 516;
Humphrey v. Tatman, 198 U. S. 91. The
sole question for decision is therefore whether, on the following
undisputed facts, the assignment of May 23 was in law
fraudulent.
The Hub Carpet Company was, on May 23, a mercantile concern
doing business in New York City and proposing to continue to do so.
The assignment was made there to secure an existing loan of
$15,000, and further advances not exceeding $15,000 which were in
fact made July 1, 1921. It included all accounts receivable then
outstanding and all which should thereafter accrue in the ordinary
course of business. A list of the existing accounts was delivered
at the time. Similar lists were to be delivered to Ratner on or
about the 23d day of each succeeding month containing the accounts
outstanding at such future dates. Those enumerated in each of the
lists delivered prior to September aggregated between $100,000, and
$120,000. The receivables were to be collected by the company.
Ratner was given the right at any time, to
Page 268 U. S. 360
demand a full disclosure of the business and financial
conditions; to require that all amounts collected be applied in
payment of his loans, and to enforce the assignment although no
loan had matured. But, until he did so, the company was not
required to apply any of the collections to the repayment of
Ratner's loan. It was not required to replace accounts collected by
other collateral of equal value. It was not required to account in
any way to Ratner. It was at liberty to use the proceeds of all
accounts collected as it might see fit. The existence of the
assignment was to be kept secret. The business was to be conducted
as theretofore. Indebtedness was to be incurred, as usual, for the
purchase of merchandise and otherwise in the ordinary course of
business. The amount of such indebtedness unpaid at the time of the
commencement of the bankruptcy proceedings was large. Prior to
September 17, the company collected from accounts so assigned about
$150,000, all of which it applied to purposes other than the
payment of Ratner's loan. The outstanding accounts enumerated in
the list delivered September 23 aggregated $90,000.
Under the law of New York, a transfer of property as security
which reserves to the transferor the right to dispose of the same,
or to apply the proceeds thereof, for his own uses, is, as to
creditors, fraudulent in law and void. [
Footnote 2]
Page 268 U. S. 361
This is true whether the right of disposition for the
transferor's use be reserved in the instrument [
Footnote 3] or by agreement
in pais, oral
or written; [
Footnote 4]
whether the right of disposition reserved be unlimited in time
[
Footnote 5] or be expressly
terminable by the happening of an event; [
Footnote 6] whether the transfer cover all the property
of the debtor [
Footnote 7] or
only a part; [
Footnote 8]
whether the right of disposition extends to all the property
transferred [
Footnote 9] or
only to a part thereof; [
Footnote 10] and whether the instrument of transfer be
recorded or not. [
Footnote
11]
If this rule applies to the assignment of book accounts, the
arrangement of May 23 was clearly void, and the equity in the
future acquired accounts, which it would otherwise have created,
[
Footnote 12] did not arise.
Whether the rule applies to accounts does not appear to have been
passed upon by the Court of Appeals of New York. But it would seem
clear that whether the collateral consist of chattels
Page 268 U. S. 362
or of accounts, reservation of dominion inconsistent with the
effective disposition of title must render the transaction void.
Ratner asserts that the rule stated above rests upon ostensible
ownership, and argues that the doctrine of ostensible ownership
ship is not applicable to book accounts. That doctrine raises a
presumption of fraud where chattels are mortgaged (or sold) and
possession of the property is not delivered to the mortgagee (or
vendee). [
Footnote 13] The
presumption may be avoided by recording the mortgage (or sale). It
may be assumed, as Ratner contends, that the doctrine does not
apply to the assignment of accounts. In their transfer, there is
nothing which corresponds to the delivery of possession of
chattels. The statutes which embody the doctrine and provide for
recording as a substitute for delivery do not include accounts. A
title to an account good against creditors may be transferred
without notice to the debtor [
Footnote 14] or record of any kind. [
Footnote 15] But it is
Page 268 U. S. 363
not true that the rule stated above and invoked by the receiver
is either based upon or delimited by the doctrine of ostensible
ownership. It rests not upon seeming ownership because of
possession retained, but upon a lack of ownership because of
dominion reserved. It does not raise a presumption of fraud. It
imputes fraud conclusively because of the reservation of dominion
inconsistent with the effective disposition of title and creation
of a lien.
The nature of the rule is made clear by its limitations. Where
the mortgagor of chattels agrees to apply the proceeds of their
sale to the payment of the mortgage debt or to the purchase of
other chattels which shall become subject to the lien, the mortgage
is good as against creditors, if recorded. [
Footnote 16] The mortgage is sustained in such
cases
"upon the ground that such sale and application of proceeds is
the normal and proper purpose of a chattel mortgage, and within the
precise boundaries of its lawful operation and effect. It does no
more than to substitute the mortgagor as the agent of the mortgagee
to do exactly what the latter had the right to do, and what it was
his privilege and his duty to accomplish. It devotes, as it should,
the mortgaged property to the payment of the mortgage debt."
The permission to use the proceeds to furnish substitute
collateral "provides only for a shifting of the lien from one piece
of property to another taken in exchange."
Brackett v.
Harvey, 91 N.Y. 214, 221-223.
Page 268 U. S. 364
On the other hand, if the agreement is that the mortgagor may
sell and use the proceeds for his own benefit, the mortgage is of
no effect, although recorded. Seeming ownership exists in both
classes of cases because the mortgagor is permitted to remain in
possession of the stock in trade and to sell it freely. But it is
only where the unrestricted dominion over the proceeds is reserved
to the mortgagor that the mortgage is void. This dominion is the
differentiating and deciding element. The distinction was
recognized in
Sexton v. Kessler, 225 U. S.
90,
225 U. S. 98,
where a transfer of securities was sustained. [
Footnote 17] It was pointed out that a
reservation of full control by the mortgagor might well prevent the
effective creation of a lien in the mortgagee, and that the New
York cases holding such a mortgage void rest upon that
doctrine.
The results which flow from reserving dominion inconsistent with
the effective disposition of title must be the same whatever the
nature of the property transferred. The doctrine which imputes
fraud where full dominion is reserved must apply to assignments of
accounts although the doctrine of ostensible ownership does not.
There must also be the same distinction as to degrees of dominion.
Thus, although an agreement that the assignor of accounts shall
collect them and pay the proceeds to the assignee will not
invalidate the assignment which it accompanies, [
Footnote 18] the assignment must be deemed
fraudulent in law if it is agreed that the assignor may use the
proceeds as he sees fit.
In the case at bar, the arrangement for the unfettered use by
the company of the proceeds of the accounts precluded
Page 268 U. S. 365
the effective creation of a lien [
Footnote 19] and rendered the original assignment
fraudulent in law. Consequently the payments to Ratner and the
delivery of the September list of accounts were inoperative to
perfect a lien in him, and were unlawful preferences. [
Footnote 20] On this ground, and
also because the payment was fraudulent under the law of the state,
the trustee was entitled to recover the amount. [
Footnote 21]
Stackhouse v. Holden, 73 N.Y.S. 203, is relied upon by
Ratner to establish the proposition that reservation of dominion
does not invalidate an assignment of accounts. The decision was by
an intermediate appellate court, and, although decided in 1901,
appears never to have been cited since in any court of that state.
[
Footnote 22] There was a
strong dissenting opinion. Moreover, the case is perhaps
distinguishable on its facts, p. 426.
Greey v.
Dockendorff, 231 U. S. 513,
upon which Ratner also relies, has no bearing on the case at bar.
It involved assignment of accounts, but there was no retention of
dominion by the bankrupt. The sole question was whether successive
assignments of accounts by way of security, made in pursuance of a
contract, were bad because the contract embraced all the accounts.
The lien acquired before knowledge by either party of insolvency
was held good against the trustee.
Reversed.
[
Footnote 1]
Williams v. Ingersoll, 89 N.Y. 508, 518-520;
Coats
v. Donnell, 94 N.Y. 168, 177.
See Rochester Distilling Co.
v. Rasey, 142 N.Y. 570, 580;
MacDonell v. Buffalo Loan,
etc., Co., 193 N.Y. 92, 104.
Compare New York Security
& Trust Co. v. Saratoga Gas, etc., Co., 159 N.Y. 137;
Zartman v. First National Bank, 189 N.Y. 267.
[
Footnote 2]
Griswold v. Sheldon, 4 N.Y. 581;
Edgell v.
Hart, 9 N.Y. 213;
Russell v. Winne, 37 N.Y. 591;
Southard v. Benner, 72 N.Y. 424;
Potts v. Hart,
99 N.Y. 168;
Hangen v. Hachemeister, 114 N.Y. 566;
Mandeville v. Avery, 124 N.Y. 376;
Skilton v.
Codington, 185 N.Y. 80;
Zartman v. First National
Bank, 189 N.Y. 267;
In re Marine Construction & Dry
Docks Co., 135 F. 921; 144 F. 649;
In re Davis, 155
F. 671;
In re Hartman, 185 F. 196;
In re Volence,
197 F. 232;
In re Purtell, 215 F. 191;
In re
Leslie-Judge Co., 272 F. 886.
Compare Frost v.
Warren, 42 N.Y. 204;
also 73 U. S. Aird,
6 Wall. 78;
Robinson v.
Elliot, 22 Wall. 513;
Smith v. Craft,
123 U. S. 436;
Means v. Dowd, 128 U. S. 273;
Etheridge v. Sperry, 139 U. S. 266;
Huntley v. Kingman, 152 U. S. 527;
Knapp v. Milwaukee Trust Co., 216 U.
S. 545.
[
Footnote 3]
Edgell v. Hart, 9 N.Y. 213, 216;
Zartman v. First
National Bank, 189 N.Y. 267.
[
Footnote 4]
Russell v. Winne, 37 N.Y. 591, 595;
Southard v.
Benner, 72 N.Y. 424, 432;
Potts v. Hart, 99 N.Y. 168,
172-173.
[
Footnote 5]
Southard v. Benner, 72 N.Y. 424, 430;
Potts v.
Hart, 99 N.Y. 168, 172.
[
Footnote 6]
Zartman v. First National Bank, 189 N.Y. 267, 270.
[
Footnote 7]
Zartman v. First National Bank, 189 N.Y. 267, 269.
[
Footnote 8]
Russell v. Winne, 37 N.Y. 591;
Southard v.
Benner, 72 N.Y. 424.
[
Footnote 9]
Potts v. Hart, 99 N.Y. 168, 172.
[
Footnote 10]
Russell v. Winne, 37 N.Y. 591, 593;
In re
Leslie-Judge Co., 272 F. 886, 888.
[
Footnote 11]
Potts v. Hart, 99 N.Y. 168, 171; N.Y. Personal Property
Law § 45; Laws, 1911, c. 626, authorizes the creation of a general
lien or floating charge upon a stock of merchandise, including
after-acquired chattels, and upon accounts receivable resulting
from the sale of such merchandise. It provides that this lien or
charge shall be valid against creditors provided certain
formalities are observed and detailed filing provisions are
complied with. It is possible that, if its conditions are
performed, the section does away with the rule "that retention of
possession by the mortgagor with power of sale for his own benefit
is fraudulent as to creditors."
[
Footnote 12]
Field v. Mayor, etc., of New York, 6 N.Y. 179.
[
Footnote 13]
Smith v. Acker, 23 Wend. 653;
Griswold v.
Sheldon, 4 N.Y. 581, 590;
Edgell v. Hart, 9 N.Y. 213,
218;
Conkling v. Shelley, 28 N.Y. 360. The statutes to
this effect merely embody the common law rule. But, in New York, an
additional statute provides that unrecorded chattel mortgages under
such circumstances are absolutely void as to creditors. New York
Lien Law § 230; Laws 1909, c. 38, § 230, as amended Laws 1911, c.
326, and Laws 1916, c. 348.
See Seidenbach v. Riley, 111
N.Y. 560;
Karst v. Gane, 136 N.Y. 316;
Stephens v.
Perrine, 143 N.Y. 476;
Russell v. St. Mart, 180 N.Y.
355.
See Stewart v. Platt, 101 U.
S. 731,
101 U. S. 735.
Compare Preston v. Southwick, 115 N.Y. 139;
Nash v.
Ely, 19 Wend. 523;
Goodwin v. Kelly, 42 Barb. 194. In
the case of a transfer of personal property by sale, retention of
possession creates a rebuttable presumption of fraud.
See
Kimball v. Cash, 176 N.Y.S. 541;
also New York Ice Co. v.
Cousins, 48 N.Y.S. 799;
Rheinfeldt v. Dahlman, 43
N.Y.S. 281;
Tuttle v. Hayes, 107 N.Y.S. 22;
Youngs v.
Wedderspoon, 126 N.Y.S. 375;
Sherry v. Janov, 137
N.Y.S. 792;
Gisnet v. Moeckel, 165 N.Y.S. 82. In order to
create a valid pledge of tangible personalty, there must be a
delivery to the pledgee.
In re P. J. Sullivan Co., 247 F.
139; 254 F. 660.
[
Footnote 14]
Williams v. Ingersoll, 89 N.Y. 508, 522.
[
Footnote 15]
Niles v. Mathusa, 162 N.Y. 546;
National Hudson
River Bank v. Chaskin, 51 N.Y.S. 64;
Curtis v.
Leavitt, 17 Barb. 309, 364;
Young v. Upson, 115 F.
192. In 1916, § 230 of the New York Lien Law was amended to the
effect that a mortgage, pledge, or lien on stocks or bonds given to
secure the repayment of a loan is, if not recorded, absolutely void
against creditors unless such securities are delivered to the
mortgagee or pledgee on the day the loan is made.
See
N.Y.Laws 1916, c. 348.
[
Footnote 16]
Conkling v. Skelley, 28 N.Y. 360;
Brackett v.
Harvey, 91 N.Y. 214;
Spaulding v. Keyes, 125 N.Y.
113;
Briggs v. Gelm, 106 N.Y.S. 693.
See Robinson
v. Elliot, 22 Wall. 513,
89 U. S. 524;
People's Savings Bank v. Bates, 120 U.
S. 556,
120 U. S.
561.
[
Footnote 17]
See note 18
infra.
[
Footnote 18]
Young v. Upson, 115 F. 192. If it is agreed that the
transferor may use the original collateral for his own purposes
upon the substitution of other of equal value, the transfer is not
thereby invalidated.
Clark v.
Iselin, 21 Wall. 360 (book accounts);
Sexton v.
Kessler, 225 U. S. 90
(negotiable securities);
Chapman v. Hunt, 254 F. 768 (book
accounts).
Compare Casey v. Cavaroc, 96 U. S.
467.
[
Footnote 19]
Compare Mechanics' Bank v. Ernst, 231 U. S.
60,
231 U. S.
67.
[
Footnote 20]
Schaupp v. Miller, 206 F. 575;
Grimes v.
Clark, 234 F. 604;
Gray v. Breslof, 273 F. 526,
527.
[
Footnote 21]
Mandeville v. Avery, 124 N.Y. 376, 382;
Stimson v.
Wrigley, 86 N.Y. 332, 338;
Dutcher v. Swartwood, 15
Hun. 31.
[
Footnote 22]
It was cited in
Young v. Upson, 115 F. 192;
In re
Michigan Furniture Co., 249 F. 978, and in the opinion here
under review.