In re the Trust Estate of Woods, Weeks & Co.

Miller, J., delivered the opinion of the Court. When Robert Garrett & Sons, hankers, issued the three letters of credit in favor of Woods, Weeks & Co., which enabled the latter to purchase and import the cargoes of sugar by the “Addie Hale,” the “Mary C. Mariner” and the “ Alice Bradshaw,” the importing firm, by an agreement appended to each letter, agreed to furnish the Garretts with funds to meet the acceptances they might make under it, and as security therefor gave them a specific lien on the cargo to an amount sufficient to cover their advances, with full power to take possession and dispose of the same at their discretion, and agreed to endorse to them the hill of lading if so desired, and further pledged to them as security for any other indebtedness of the firm to them, any surplus that' might remain either in the goods or proceeds thereof, after providing for the acceptances under that credit. When the cargoes severally arrived in Baltimore the acceptances of the Garretts had not matured, and they received the hills of lading and took possession of the cargoes as security for the indebtedness of the firm, according to the terms of the letters of credit and the contracts thereto attached. But the firm being desirous of obtaining immediate possession of these cargoes for the purpose of their business as sugar refiners, after the arrival of each vessel, entered into a separate contract with the Garretts by which this object was accomplished. By these contracts the Garretts parted with their possession of, and lien on the cargoes, and received in lieu thereof certain collateral secu — 534 — rities in each case. The terms of these several agreements are identical, and I shall take the case of the importation by the “ Addie Hale ” as an illustration. The letter of credit under which this importation was effected was for $50^000, and the Garretts had accepted drafts thereunder to the amount of $40,000. When the cargo arrived the Garretts held the bill of lading and took possession of the sugar, and afterwards delivered it to the firm upon the latter giving them a receipt for the merchandise specified in the bill of lading “ against notes deposited with them as collateral security, amounting to the sum of $60,140.18, as per memorandum on the other side.” This receipt which embodies the contract and engagement on the part of the firm, then stipulates that if the drafts accepted by the Garretts be not covered by the firm at the time specified in the letter of credit, then the Garretts “ may at any time thereafter proceed to sell said securities, at either public or private sale, without notice of time or place of sale for the purpose of satisfying said credit, and upon such sale said Garretts may purchase the whole or any part of such securities so sold, discharged from any right of redemption, and it is understood and agreed that any and all other securities belonging to the firm now in the hands of the Garretts shall be liable for any deficiency on account of this contract, and any surplus from this contract after settlement thereof shall be applied to any indebtedness that may be due or become due to said Robert Garrett & Sons.” Of the securities, amounting in all to $60,140.18, referred to in this contract and noted thereon, $20,140.18 consisted of notes and bills, due and payable to the firm by their customers, and endorsed by the firm to the Garretts, and $40,000 consisted of the firm’s own notes, payable to their own order and endorsed by the firm in blank and by them delivered to the Garretts. Some time after these contracts were made and the securities delivered thereunder, the firm failed and executed a deed of — 535 — trust conveying all their property to Perot as trustee for the benefit of their creditors. The firm, therefore, failed to meet their obligations to the Garretts, and the latter in pursuance of the power of sale under these contracts, sold the notes of the firm thus pledged as collateral security for their debt. Of these notes those sold to Drexel, Morgan & Co. were sold after their maturity, and those sold to Harvey were sold before they matured. The proceeds of these sales, as well as the amount collected from the other collaterals, were applied by the Garretts in part payment of the debt due to them, and a balance still remains due thereon. A Court of equity has taken charge of the administration of the trust created by the deed, the assets of the firm have been sold by the trustee, and the proceeds have been brought into Court for distribution. Under notice to creditors the Garretts have filed a claim for the balance thus due to them, and the purchasers of these notes have also presented them as claims against the fund, and the main question in the case is, have these purchasers a right to a dividend for the full amount of these notes ? It seems to me that this and all other controverted questions arising on these appeals depend altogether upon the validity or invalidity of these contracts. In other words, was it competent and lawful for the firm to draw their own notes, payable to their own order, endorse them in blank and deliver them to the Garretts as collateral security, with power to the pledgees in case of default by the pledgors, to sell them in the market for what they will bring, and apply the proceeds in discharge of the debts they were pledged to secure ? There is nothing to show that these contracts were not made in good faith, nor is it pretended the Garretts did any anything under them which the contracts themselves did not expressly authorize. The power of sale is expressed in the broadest terms. It may he made without notice of time or place, and at any time after default whether the notes had then matured or not. The fairness — 536 — and good faith of the sale stand unimpeached. Nor if the contracts he valid can it be pretended that the Garretts are responsible for the consequences resulting from the sale. It was their undoubted right to secure, if possible,, by all lawful means full payment of this debt which was most justly due them. The contingency of a sale is expressly provided for, and its effects must have been within the contemplation of the parties when the contracts were made. Are they then valid and lawful contracts? In answer to this question I must say I am unable to perceive upon what ground they can be successfully assailed. Certainly not for want of consideration, for the Garretts upon the faith of them gave up the property they held which was ample security for the debt, and the firm acquired immediate possession of it for their business purposes. If it be said they constitute a preference, and are therefore void as against creditors, the answer is that apart from the provisions of the insolvent or bankrupt laws, a debtor has the unquestioned right, provided he acts in good faith, to prefer one creditor to another. No question under the insolvent or bankrupt laws arises in this case, and the failure of the firm and the execution of the deed of trust, in nowise prevented the carrying out of the contracts or took from the Garretts any rights which they held under them. On what principle can it be said that a contract like this between debtor and creditor, made intelligently and in good faith, can he altered in a way prejudicial to the creditor, or its execution prevented by the subsequent insolvency of the debtor ? It has been argued that such contracts are against public policy and therefore void. But the right of parties to contract as they please is restricted only by a few well defined and well settled rules, and it must he a very plain case to justify a Court in holding a contract to be against public policy. It must be a case in which the common sense of the entire community would so pronounce it. But to apply this doc — 537 — trine to a commercial contract of this description entered into in good faith between merchants, would, in my judgment, be as unwarranted as it is unprecedented. But it is said the giving of these notes was a mere increase or duplication of the debt due by the firm to the Garretts, and they cannot he used or considered as collateral security therefor, that the amount of that debt diminished by the proceeds of the other collaterals, is all that is entitled to a dividend under this deed, and that such dividend must he distributed pro rata between the Garretts and the purchasers of the notes. It is true the effect of carrying out these contracts by a sale of the notes was to increase the general indebtedness of the firm, hut it did not increase the debt then due the Garretts for which the notes were pledged as security. But this increase of general indebtedness is exactly what the contracts contemplated, and what the parties intended in case a sale was made, so that the question comes hack at last to the validity of the contracts in this respect. Row, if instead of giving these notes, in the form in which they were drawn, to the Garretts as collateral security, the firm had placed them in the hands of a broker, for sale, and he had sold them to the same parties, and for the same price the Garretts obtained for them, and the firm had received the proceeds and applied them to this debt, exactly the same result would have followed. There would have been the same increase of the general indebtedness of the firm and the same dimunition of the Garrett debt, which was effected by the sale under the contracts, and in the case supposed it will hardly he contended that the purchasers would not have had a valid claim against the firm for the full amount of the notes. Such notes are constantly sold on the'streets in all the large commercial cities of the country, and it is not uncommon for merchants to resort to this mode of raising money. However hazardous it may he, there is nothing unlawful in it, — 538 — and it cannot be doubted but that the purchasers acquire a good title to such paper. It is apparent to my mind, that it was in view of this recognized practice, and the acknowledged rights of purchasers in such cases, that these contracts were made and the notes sold thereunder. With this right of sale, the notes became, in the hands of the Garretts, a valuable and reliable security for the debts due to them under the letters of credit, and I am unable to discover any ground on which the firm or their other creditors can impeach the transactions. The authorities cited in support of opposite conclusions, while differing in other respects, appear to me to he clearly distinguishable from the present case in that there is here an express potver of sale, which the parties intended if carried into effect, should result in the consequences which have followed, and which has been actually executed. Expressions dropping obiter from Judges in one or two cases only, even if they tend to support such conclusions, are wholly insufficient to establish them, and I have seen no case in which it has been necessary to decide, or in which it has been decided that such contracts are either unlawful or ineffectual. On the contrary, there are decisions entitled to the highest respect, which in my judgment, go very far to sustain them. I refer to the cases of The Morris Canal & Bank Company vs. Fisher, 1 Stockton’s Ch. Rep., 671, and In re Regents Iron Works Company, (Law Rep.,) 3 Ch. Div., 43, which was decided in 1876. In the first of these cases,, the facts are briefly these : The Canal Company borrowed $1500 from Mr. Lewis, and gave him their note for that amount, at eight months, and at the same time deposited with him as collateral security, their own bonds to the amount of $3000. The note was not paid at maturity, and Lewis, after notice to the Company, advertised and sold the bonds at public auction. The bonds did not sell for enough to pay the note, and Lewis recovered a judgment against the Company for the — 539 — "balance* Fisher, the purchaser of the bonds, then insisted upon his right to he recognized as their creditor for the full amount of the bonds, and this claim was resisted by the Company. But upon a bill filed to enforce it, the chancery Court decided, (and that decision was affirmed by the unanimous judgment of the Court of Appeals,) that the claim was well founded, and that the purchaser was entitled to the extent of the bonds held by him, equally with all the other bondholders, to the benefit of the mortgage given by the Company on all their property as security for the bonds they had authorized to be issued. In the latter case it appears that the Iron "Works Company resolved to issue one hundred debentures of £250 each. Sixty of these were taken up by different persons, and then the International Financial Society agreed to advance to the Iron Works Company £8000, by discounting their notes to that amount, hearing ten per cent, interest, and as collateral security for the money so advanced, the Company gave to the Society the other forty debentures amounting to £10,000. It was also agreed that if the notes were not paid, the Society should be at liberty to sell the debentures, and apply the proceeds of sale towards the payment of what remained due to them, but this power of sale was never exercised, and the Society held on to the debentures. The Company was afterwards ordered to be wound up, and there was in Court a considerable sum, the proceeds of their property. The Society to whom about £5600 was due for principal and interest, claimed to prove for the £10,000, and to share with the other debenture holders. Row in this state of facts, how was the case dealt with by the Court? The Vice-Ghancellor, (Malins,) was of opinion and ordered that the Society was entitled to prove for the amount of the forty debentures transferred to them, pari passu with the holders of the other sixty, but is not to receive more in the whole than what is due them for principal, interest and costs, in respect — 540 — of the £8000 advanced by them with ten per cent, interest. On appeal, it was argued that these debentures might perhaps have been issued at a discount, but could not be issued as collateral security; that the property of the Company might be made collateral security, but not these debentures. But the order was sustained and the appeal dismissed. James, L. J., in delivering his judgment says : “the Company has dealt with these forty debentures, by making them a collateral security for the sum of £8000, and interest at ten per cent. That was the bargain between the Financial Society and the Company. The Company could not recede from that bargain, and I cannot see that there is any equity on the part of the holders of the other sixty to alter the bargain between the debtors and the creditors.” Mellish, L. J., says: “as between the Company and' the Society, there is no doubt that the debentures were to be a collateral security for the money which was lent upon the promissory note and interest. That was the bargain between them, and one of the terms of the bargain was that the Financial Society was to be entitled to sell the debentures. * * Then the real question is, have the other debenture holders any equity to prevent that bargain from being carried out ? * * I do not see any reason why they should complain that the directors issued them as a collateral security, for the payment of the notes and interest. They are not injured as the debentures cannot be paid twice over-—they can only he paid once. The order treats them as a colláteral security, and says that they are to be availed of until the holders are paid the whole amount for which they were intended to be a collateral security. That order appears to me to be quite correct.” And Bas&allay, A. J., says: “ I am of the same opinion. It appears to me that the directors had power to do that which they did, namely, to issue the debentures for £10,000, as a collateral security for the loan of £8000, which was primarily secured by the promissory notes.” — 541 — These cases have been cited, not as conclusive of this, because the facts are not identical, and it is possible there may he some distinction between them, hut in support of the position that other obligations of the same party may he issued and used, and treated as collateral security coupled with a power of sale for a debt which he owes. Row if it he once conceded that it is competent and lawful for a merchant to make a note payable to his own order, endorse it in. blank, and sell it on the street through a broker in order to raise money to carry on his business, why may he not, for like business purposes, give such a note as collateral security for an existing debt, with power to his creditor to sell it in the market in case he makes default in paying that debt ? Other creditors are no more injuriously affected, and he no more “ encumbers his assets to the prejudice of his other creditors ” by the one transaction than by the other, and I cannot see what equity they have to prevent such a contract from being carried out, or what legal right of theirs it invades, if it he made and executed in good faith. Holding then that these contracts are valid and effective, I do not think the question whether the notes were sold before or after maturity at all material. The power to sell after maturity is expressly given by the contracts, and when so sold the notes fulfilled the design of their makers, and accomplished the purpose for which they were issued as effectually as if they had been sold before maturity. In the face' of these contracts the makers have no equity to set up against the notes, and the purchasers could safely take them, though overdue. In the case of Renwick vs. Williams, 2 Md., 356, Mrs. Chase loaned her grandson, Barney, her promissory note for $2000. He gave her nothing for it. After its maturity he transferred it to Ren wick in settlement of two hills of furniture, amounting to $155.50, and the Court held that Renwick was entitled to recover the whole amount of the note against the — 542 — executors of the maker. Other authorities almost without number could he cited to the same effect. The present case, however, is much stronger than that of overdue accommodation paper, because the makers have here expressly stipulated in writing that the notes might be sold at any time, as well after as before maturity. (Decided 17th July, 1879.) Inasmuch as all the dealings between the Garretts and this firm were founded on contracts identical with the one thus noticed and considered, and all the notes held under these several contracts were disposed of to the same parties, it follows, in my judgment, that account G is stated upon correct principles, and the order appealed from which ratisfies account L should he reversed upon the appeals taken by the Garretts, by Drexel, Morgan & Co., and by Harvey. As respects the appeal taken by the Western Bank, all that need he said is that this Court has been informed by the Bank’s counsel, since the appeal was taken, that its claim has been settled aud paid in full, and hence no question presented by that appeal is before the Court, even if any different question from those already considered in this opinion would have arisen if the claim had not been paid and settled. I am instructed by a majority of the Judges who have participated in the consideration and decision of this case, to say that they concur in the views expressed in this opinion, and the result therefore is, that the order appealed from must be reversed and the cause remanded, to the end that an account may he stated distributing the fund accordingly. The costs of these appeals is directed to he paid out of the fund. Order reversed, and cause remanded.