Bank of Brookings v. Aurora Grain Co.

McCOY, J. This- action in conversion was commenced about the 1st day of April, 1919, by plaintiff to recover from defendants the value of plaintiff’s interest as a mortgagee in certain grain sold and delivered by the mortgagor to defendants’ elevator about the 1st day of Séptember, 1918. From verdict and judgment in-favor of plaintiff, defendants appeal. [1] Appellants have duly presented the question of the sufficiency of the evidence to sustain the verdict. It appears from the record that the mortgagor sold and delivered grain to -defendants at their elevator, and that the proceeds of said grain amounted to $2,568.95; that respondent .claimed a chattel mortgage lien on said grain amounting to $1,467.85 with interest thereon; that about the time said grain was delivered to defendants respondent notified them not to pay the proceeds thereof to the mortgagor; that thereafter, in the United -States District Court on petition of said mortgagor, he was adjudged and declared to be a bankrupt on the 23d day of September, 1918, and' that on about the 25th d'ay of October, I9i'8, one Rausch was duly appointed and qualified as the trustee in bankruptcy of the estate of said mortgagor; — 596 — that thereafter on the 7th day of April, 1919, the referee in bankruptcy made and issued a summary order in said United States District Court adjudging and requiring that appellants turn over to said trustee in bankruptcy the said $2,568.95, to be distributed by him under the orders and direction of the said United States District Court; and that thereafter on the 22d day of 'April, 1919, and prior to the trial of this action, and pursuant to said order of the said referee in bankruptcy, the defendants paid and turned over to the said trustee in 'bankruptcy the said $2,568.95. We are of the opinion that the evidence was wholly insufficient to sustain the verdict or judgment. At the time this action was tried, the proceeds of said morgaged grain was not in the possession or under the control of defendants, but was then in the possession and under the control of an officer of the United States District Court by virtue of an adjudicated order in an action having jurisdiction of the subject-matter of this suit. In the case of Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405, it was held that where property of a bankrupt had come into the hands of a third party, before the filing of the petition in bankruptcy, where the third party asserted no adverse claim, the bankruptcy court might summarily order the property or assets to be delivered to the trustee in bankruptcy; that the filing of the petition is notice to the world of the jurisdiction of the bankruptcy court; that if the third party sets up an adverse claim the bankruptcy court has jurisdiction to ascertain the basis for such adverse claim; that the filing of the petition has the legal effect of placing an attachment on the property and assets of the bankrupt in the possession of the bankrupt or his agent. In Whitney v. Wenman, 198 U. S. 539, 25 Sup. Ct. 778, 49 L. Ed. 1157, it was held that the bankruptcy court has jurisdiction to determine all controversies concerning the property of tire bankrupt, in whose-soever hands the same may be, and concerning the nature, character, and extent of all liens thereon. [2] Assuming that the lien of the mortgage was terminated by the sale and delivery of the grain to the defendant company by consent of 'both the mortgagor and mortgagee, and that the lien by consent of both w.as transferred and attached to the money in the hands of tire defendant grain company, we have a case in which property belonging to the bankrupt, but subject to a lien, — 597 — was in the hands of a third person, at the time the petition in bankruptcy was filed. Under the Bankruptcy Eaw (U. S. Comp. St. §§ 9585-9656), title to all property of the bankrupt vested in the trustee, subject to the lien. In this case neither the defendant nor any other person has challenged or has proposed to contest the rights of the plaintiff as lienholder. In Brandenburg Bankruptcy (4th Ed.) § 1168, it is said: ■ “Where a third person holds property at the time of the bankruptcy merely as agent or bailee of the bankrupt, and asserts no adverse claim thereto, the bankruptcy court, which includes the referee, may by summary proceedings compel the delivery thereof to the trustee in bankruptcy; but where he acquires the possession prior to the bankruptcy, and claims the right .to hold the property as against the bankrupt or the .trustee, making a real, though fraudulent and voidable, adverse claim, and does not consent to the jurisdiction, he is entitled to have his rights determined in a plenary suit, in the state or district court.” —citing Babbit v. Dutcher, 216 U. S. 102, 30 Stop. Ct. 372, 54 L. Ed. 402, 17 (Ann. Cas. 969, where it is said: “There are two classes of cases arising under the act of 1898 and controlled by different principles. The first class is where there is a claim of adverse title to property of the bankrupt, based upon a transfer antedating the bankruptcy. ■ The other class is where there is no claim of. adverse title based on any transfer prior to the bankruptcy, but where the property is in the physical possession of a third party or of an agent of the bankrupt, or of an officer of a bankrupt corporation, who refuses to deliver it to the trustee in bankruptcy. In the former class of cases a plenary suit must be brought, either at law or in equity, by the trustee, in which the adverse claim to title can be tried and adjudicated. In the latter class it is not necessary to bring a plenary suit, but the bankruptcy court may act summarily and may malee an order in a summary proceeding, of the delivery of the property to the trustee, without the formality of a formal litigation.” [3,4] In the first .class of cases, an adverse title to the property exists and is asserted; in the second class, the party in possession making no adverse claim., refuses to deliver it to the trustee. In the first class, a plenary action, must be brought by the trustee to adjudicate the question, claim., or title; in the latter — 598 — class, delivery of the property to the trustee may be enforced by summary proceedings without formal suit. In the case at bar, the defendant grain company is not making, and has never made, a claim adverse to the plaintiff or to the trustee, to the property in its hands. Neither has it, for any reason, refused to deliver it to the trustee in bankruptcy. Therefore it seems entirely clear that the referee had jurisdiction by summary proceedings, to compel the delivery of the property to the trustee, and' that the defendant grain company was not guilty of a conversion of the plaintiff’s interest in the property, when it delivered it 'to the trustee, in compliance with the order of the referee. If the view of our dissenting associates be correct, it becomes the duty of a person holding property of a bankrupt to assert and litigate at his peril the rights of a third person and those of the trustee in bankruptcy, even though he himself makes no claim, adverse or otherwise, to any title or interest in the property. We cannot conceive this to be the law. A question of adverse claim would have arisen had defendant company, being in possession, asserted in itself some interest adverse to the right of the bankrupt or the trustee in the bankruptcy, to possession of the property. Such was the case in First National Bank v. Title & Trust Co., 198 U. S. 280, 25 Sup. Ct. 693, 49 L. Ed. 1051. In that case the bankruptcy court undertook to adjudicate in summary proceedings adverse claims actually asserted by the person in possession. It was held that this could not be done, and perhaps that such matter could not be so litigated in a summary proceeding, even by consent of the “proposed defendant.” But neither the Bankruptcy Law nor any decision we 'have been able to find places any inhibition, jurisdictional or otherwise, upon the right of the trustee to claim possession of the property by summary proceedings, when the person in possession makes no claim to any title, lien, or interest in such property. Nor have we found any decision which holds that a person in possession is bound at his peril to assert adverse claims of third persons against a trustee in bankruptcy Who is seeking possession by summary proceedings. Had the property in this case been in possession of the plaintiff bank, summary proceedings would not lie to compel surrender of the property to the trustee, if the lien of the mortgage were asserted adversely. In such-case plenary -suit would" be ’necessary.'-But Where — 599 — the person in possession himself neither has nor asserts any adverse claim, as in this -case, the order of the referee is valid, and the surrender of the property under a valid order of the bankruptcy court should be held to protect the defendant from any liability to the plaintiff. [4, 5] The fundamental elements of conversion are lacking. The general rule, with few exceptions not applicable to the facts of this case, seems to be that to sustain wrongful conversion the defendant must be shown to have intentionally 'converted the property to his own use, or to have assumed or exercised dominion over the same for the purpose of obtaining some benefit to himself, or to have injured or destroyed the same or to have done some wrongful act that occasioned such property to be lost to the owner, or to the person entitled thereto under the owner. The appellants came lawfully into the possession of the proceeds of said grain 'by and with the consent of the owner, and also by and with the consent of respondent who claims a lien thereon. The appellants were bailees, in the nature of warehousemen, and held the proceds of the grain in question in that capacity. The money proceeds represented the grain that had been delivered to appellants’ warehouse. Such' money proceeds belonged to the mortgagor, Brightwell, subject to the respondent’s mortgage. While said proceeds were so in the hands of appellants, Bright-well, upon his own voluntary petition, w'as adjudged and declared to be a bankrupt, in bankruptcy proceedings then pending in the United 'States court. Under the authority of 'Mueller v. Nugent, supra, the adjudication upon said petition in bankruptcy had the effect of placing an attachment upon all the property of said mortgagor, in whosoever hand's the same might be, and also thereby invested the-trustee in said bankruptcy proceeding with all title, right, and interest in and to the property of said bankrupt, including the proceeds of said grain, subject to respondent’s mortgage. The appellants claimed no right, title, or interest in said proceeds adverse to the trustee in bankruptcy, nor adverse to the 'bankrupt, nor adverse to the respondent. Under these circumstances, the trustee in bankruptcy, armed with the summary order of the referee, demanded possession of said- proceds from appellants, and appellants in accordance with the commland of said order and the demand of the trustee, and not otherwise, delivered — 600 — said proceeds to said trustee. Appellants cannot be said to have voluntarily surrendered possession of said proceeds to the trustee. Clegg v. Boston Warehouse, 149 Mass. 454, 21 N. E. 877, 14 Am. St. Rep. 436. Respondent’s mortgage lien is just as valid and effective with the said proceeds in the hands of the trustee in bankruptcy, as it would have been with the said proceeds in the hands of appellants. It therefore necessarily follows that the act of the appellants in delivering said proceeds to a trustee in bankruptcy did not constitute a conversion and in no manner injured or damaged the respondent, as the said act in no manner occasioned any loss of any right of respondent. We are of'the opinion that the appellants were justified, under the circumstances of this case, in not delivering said proceeds or any part thereof to respondent at the time respondent demanded possession immediately prior to the beginning of this action, as appellants then had notice of and were bound by said bankruptcy proceedings; that such refusal under such circumstances did not' constitute conversion. We are also of the view that the evidence on the trial failed to show any conversion of the proceeds of said grain by appellants. Bolling v. Kirby, 90 Ala. 215, 7 South, 914, 24 Am. St. Rep. 789, and note on pages 804-808; Dent v. Chiles, 5 Stew. & P. (Ala.) 383, 26 Am. Dec. 360. [6] There is also another and further reason wherein the-evidence fails to show a .conversion. The facts of this case are. within the exception to the general rule that it is a conversion by a bailee to deliver goods to one not the owner; the exception being that where a bailee dlelivers the subject-miatter of the conversion to an officer of the law!, by virtue of process of law, such, a delivery will not constitute a conversion. Under the circumstances of this case, where the appellants made no. adverse claim to the said proceeds- as against the trustee in bankruptcy, the said proceeds must be treated as being in the custody of the law, from and after the appointment of the trustee, and where the delivery was made to the trustee by virtue of process of law requiring such delivery, the appellants could not be held to be guilty of conversion. Stiles v. Davis, 1 Black, 101, 17. L. Ed. 33, and cases cited in Rose’s note to this case, page 115; Clegg v. Boston Storage Warehouse, 149 Mass. 456, 21 N. E. 878, 14 Am. St. Rep. 437; Cooley v. Transfer Co. 53 Minn. 327, 55 N. W. 142, 39 — 601 — Am. St. Rep. 609; Kohn v. Ry. Co., 37 S. C. 1, 16 S. E. 377, 24 L. R. A. 101, 34 Am. St. Rep. 728; Ohio & M. Ry. Co. v. Yohe, 51 Ind. 181, 19 Am. Rep. 727. In Stiles v. Davis and O. & M. Ry. Co. v. Yohe, supra, it is held that the bailee cannot question the legality of the process of law under which he is required to make the delivery of the property into the custody of the law. Many of the cases cited held that the property must be considered as 'being in the custody of the law although the actual possession still remained in the hands of the bailee. Therefoxe we are of the view that in this case .the proceeds of said grain must be treated as being in the custody of the law from and after the said adjudication in bankruptcy, and that the trustee was thereafter entitled to' the possessioxr thereof for the purpose of the proper and legal adlnixiistxation of the said bankrupt's estate in said' bankruptcy proceeding wherein the respondent should and could have whatever rights he possessed under his mortgage lien determined. [7] The fallacy of the dissenting opinion consists in the fact that, under the circumstances of this case, appellants did xiot hold the said proceeds of grain as a-trustee, but held the same as a gratuitious bailee. It cannot truthfully be said that appellants converted the grain by mixing it with other grain and selling the same in the usual course of their elevator business, as it conclusively appears from: the record that respondent consented to such a sale, but under such circumstances as to not waive its mortgage lien on the proceds- of such sale which remained in the hands of appellants as a bailee in lieu and in place of the gxain. We are of the opinion that such transaction did not constitute the appellants a trustee, of xespondent. Section 989, Code 1919. The trust relationship can only be established by agreexnent of the parties, voluntarily entered into, or by operation and construction of law under sections 1193, 1194, Code 1919. The record -does not disclose that appellants ever entered into axiy such a trust agreement with any oxie to so hold this property; neither had they been guilty of axiy fraudulent or tortious or other wrongful conduct in relation thereto; nor were they at or prior to the time they delivered the same to the trustee in bankruptcy wrongfully detaining the same from any person whosoever. Their possession had been gained' only by and -with the consent of both the mortgagor and mort — 602 — gagee in the ordinary business course of buying and selling grain' through their warehouse. In the case of Threshing Machine Co. v. Calhoun, 37 S. D. 542, 159 N. W. 127, there was an express agreement between all interested parties making a third party a trustee by and with the consent of the trustee. The record in this case discloses no such agreement. Therein lies the reason why the Calhoun Case has no application to the facts of this case. There is no escape from the proposition that appellants did not injure respondent.' His lien was just as valuable and effective again the trustee in bankruptcy. He had notice long before he commenced this action that the bankruptcy court had acquired jurisdiction, and right of possession, of the property of the bankrupt mortgagor. The judgment and order appealed from are reversed.