Bank of Buffalo v. Aetna Indemnity Co.

The Bank of Buffalo presented its claim against the Aetna Indemnity Company, basing it upon two bonds issued by it to the bank to secure two warehouse receipts given by the American Warehousing Company to the Niagara Mill and Elevator Company, and pledged by it to secure the payment of a loan of $10,000 made by the bank to the Niagara Company. This appeal is from an order of the Superior Court allowing the claim.

Under the terms of its bonds the Aetna Indemnity Company agreed to make good to the bank any loss that might accrue to it through the negligence or dishonesty of the Warehousing Company or its custodian, according to the terms of the warehouse receipts.

The bank claims that the failure of the Warehousing Company to deliver the merchandise pledged with it, upon the demand of the bank, was due to the negligence of the Warehousing Company. The trial court so held and in its memorandum of decision said: "It was clearly the negligence of the Warehousing Company in not taking and retaining possession of the property described in the warehouse receipts that led to its failure to have the goods when demanded by the Bank of Buffalo."

The failure of the Warehousing Company to take and retain possession of the goods pledged, made, the bank contends, the pledge ineffective against general creditors of the Niagara Company, and constituted negligence, and as a consequence a breach of these bonds.

All of the contracts surrounding this transaction, including that arising from the delivery of these bonds, were made in New York, and hence are governed by the law of New York.

The Warehousing Company was engaged in the business of field storage warehousing, that is, it warehoused the goods of the bailor, in this case Rodebaugh and his successor, the Niagara Company, upon the premises leased by the bailor to it, and issued its warehouse receipts to the bailor who gave them as collateral security for credit obtained by him. Apparently the bailor continued in control of the premises and the goods therein, with the right to sell the goods, provided he continued ready to meet the demand of the holder of the receipts.

In New York this business is not uncommon, and is entirely legitimate.

In this case the grain for which warehouse receipts were issued was fungible, and by the terms of the contract between the Warehousing Company and the Niagara Company, the latter could sell the grain from time to time provided it had on hand upon demand the amount of grain called for by the receipts.

The bank maintains that a pledge of property with a field-warehousement is ineffectual against the creditors of the bailor where it is not segregated and marked, and that without these no valid possession of the pledge is taken.

The receiver maintains that the Warehousing Company had possession from the inception of its contract with Rodebaugh, because of (1) its marking of the corners of the premises on which the grain was stored, (2) its rights as lessee of the premises on which the grain was stored and the public record of the lease, and (3) its designation of a custodian of the grain and his continuance as custodian until he surrendered it to the Warehousing Company.

We incline to the opinion that there was, at the inception of this transaction, no sufficient taking of possession of the thing attempted to be pledged to make it a valid pledge against general creditors. The marking was not adequate notice. The recording was not required by law, and hence no constructive notice. The custodian remained an employee of the pledgor and any possession he may have had was that of his employer; the repayment to his employer of the compensation paid him as custodian indicates this. Mathews v. Hardt, 79 N.Y. App. Div. 570, 581,80 N.Y.S. 462; American Can Co. v. Erie Preserving Co., 171 F. 540, affirmed, 105 C.C.A. 388, 183 F. 96; Security Warehousing Co. v. Hand,206 U.S. 415, 27 Sup. Ct. 720. Had the receiver obtained possession prior to the Warehousing Company doing more, the bank's claim that it was negligent in failing to take possession of the grain pledged to it by contract must have been sustained.

Did the assertion of the right to possession, and the placarding of the premises and its contents by the Warehousing Company two weeks prior to the appointment of the receiver and one month before the Niagara Company was adjudicated a bankrupt, change this? Counsel for the bank argue that this assertion of a right to possession and the accompanying placarding were not an attempt to perfect an existing lien, but to create a lien which as to the creditors of the Niagara Company did not theretofore exist.

What was done by the Warehousing Company was the taking of actual possession of this grain. Its contract with Rodebaugh, and hence with the Niagara Company, was one of pledge. As a pledgee it had the right to the possession of the thing pledged. Its attempt in the beginning to take possession was ineffective; it had the right to secure its lien by taking possession. Until this was done its lien was inchoate. When it did take possession it was in fulfilment of its right to perfect the lien of its contract of pledge, and not in creation of a new right. Under the law of New York, and the general law of the land, a contract for a pledge, ineffectual for want of delivery of the pledge, can be made effectual by delivery of the thing pledged. Of course, fraud will prevent the inchoate lien becoming perfected, and so too will the acquisition of a specific right to a lien on the pledge by a creditor. The finding of the committee discloses neither fraud nor bad faith, and no acquisition of a specific right of lien upon the grain by any creditor at the time the Warehousing Company took possession. Parshall v. Eggert,54 N.Y. 18; Niles v. Mathusa, 162 N.Y. 546, 57 N.E. 184;National Bank of Deposit v. Rogers, 166 N.Y. 380,59 N.E. 922; Sexton v. Kessler Co., 225 U.S. 90,32 Sup. Ct. 657.

Its inchoate lien having become perfected, the possession of the Warehousing Company as pledgee related back to the time its right under its contract to take possession was created. It could not be disturbed in its possession unless some statute invalidated its possession.

The bank insists that, under the Federal Bankruptcy Act, the seizure of possession by the Warehousing Company was a preference within that Act, open to attack by any creditor of the bankrupt because the perfecting of the lien was within the four-months period of the Act which makes transfers of property within such period under certain circumstances unlawful preferences.

The validity of this lien is by the United States Supreme Court made to rest upon the local law of New York. The immediate question is whether the exercise of the right to take possession of the pledged property within the four-months period constituted an illegal preference. Had the transfer been made upon a present consideration, with no intent to hinder or to defraud creditors, it could not be attacked as an illegal preference. Nor does it make it an illegal preference where the consideration was past and the transfer was made in perfecting a pre-existing agreement of pledge and within four months of bankruptcy, provided the transfer was valid under the local law and made with no intent to hinder or defraud creditors. The exercise of a pre-existing right, lawful in the local jurisdiction, although occurring within the prescribed period, is not an illegal preference unless made with intent to hinder or defraud creditors. The pledgee taking possession in pursuance of and in the enforcement of his pre-existing right is prima facie presumed to take in the belief in his right and not in the belief that his taking is with intent to give himself a preference. Thompson v. Fairbanks, 196 U.S. 516, 25 Sup. Ct. 306; Humphrey v. Tatman, 198 U.S. 91, 94, 25 Sup. Ct. 567;Sexton v. Kessler Co., 225 U.S. 90, 98,32 Sup. Ct. 657; Sexton v. Kessler Co., 97 C.C.A. 161, 172 F. 535, 540; In re Automobile Livery Service Co., 176 F. 792, 795; Dale v. Pattison, 234 U.S. 399,34 Sup. Ct. 785; Taney v. Penn Bank, 232 U.S. 174,34 Sup. Ct. 288.

To set aside this pledge by the terms of the statute, it must appear that "the person receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference." Pyle v. Texas TransportCo., 238 U.S. 90, 98, 35 Sup. Ct. 667. Whether the Warehousing Company had "reasonable cause to believe" was a question of fact, and the burden of proof of this was on the receiver. The committee finds no facts from which such a conclusion could be drawn. Its findings completely overthrow the claim that the Warehousing Company gained possession of this grain by an unlawful preference. Pyle v. Texas TransportCo., 238 U.S. 90, 97, 35 Sup. Ct. 667.

Since the Warehousing Company was not negligent in taking possession of this grain, our next inquiry is whether it was negligent in permitting the grain to be taken from it by the receiver. The finding answers this. The receiver took possession of the grain, asserted possession against all, including the Warehousing Company, in one instance by armed force. The possession of the Warehousing Company was taken from it by an officer of the Federal court acting under its order. Thereafter the Warehousing Company "demanded the return of its possession, but such demand was not acceded to." The report of the committee shows the course of the receiver to have been without justification in law, and that of the Warehousing Company to have been reasonable and diligent. Negligence can only be predicated upon a failure in duty, and the Warehousing Company acted within its rights and fully performed its duty. It was not negligent, and hence the defendant's bonds were not breached.

There is error, the order is reversed and the cause remanded with direction to the Superior Court to render judgment disallowing the claim of the Bank of Buffalo.

In this opinion the other judges concurred.