In re Rodgers

JENKINS, Circuit Judge (after stating facts as above). The court below properly ruled that it had jurisdiction of the subject-matter. [177] Its officers acquired possession of the property in dispute from the bankrupt. It is, indeed, claimed by the storage company that the writings and the facts embodied in the statement of the case show that it, and not the bankrupt, had possession prior to the bankruptcy; but the receiver had in fact acquired peaceable possession of the property, and subsequent proceedings in the bankruptcy court upon petition of the present objectors to the jurisdiction, by which the property was sold by the bank under stipulation that it should hold the fund subject to the order of the court, placed the property and its proceeds in custodia legis, and the court had the right to determine the ownership of the fund in its possession. Haven & Geddes Company v. Pierek, Trustee (C. C. A.) 120 Fed. 244; In re Antigo Screen Door Company, herewith decided, 123 Fed. 249. The policy of the law of the state of Illinois denounces all secret liens upon property. They are held to be constructively fraudulent as to creditors, and the property, so far as their rights are concerned, is considered as belonging to the one having the ostensible possession. Ketchum v. Watson, 24 Ill. 591; McCormick v. Hadden, 37 Ill. 370; Murch v. Wright, 46 Ill. 487, 95 Am. Dec. 455; Chickering v. Bastress, 130 Ill. 206, 22 N. E. 542, 17 Am. St. Rep. 309; Peoria Manufacturing Company v. Lyons, 153 Ill. 435, 38 N. E. 661. And so property held upon conditional sale is subject to attack, and may be held against the vendor by creditors of the possessor; and this upon the ground that to suffer, without notice to the world, the real ownership to be in one person and the ostensible ownership in another, gives a false credit to the latter, and in this way works an injury to third persons. It is said in The Union Trust Company v. Trumbull, 137 Ill. 146, 180, 27 N. E. 33: “There is no mode under our law, except hy chattel mortgage duly acknowledged and recorded, by which the owners of personal property, retaining its possession, can give another a lien upon it that can be enforced as against creditors and subsequent purchasers.” Although the rule is otherwise in other states with respect to conditional sales (Harkness v. Russell, 118 U. S. 663, 7 Sup. Ct. 51, 30 L. Ed. 285), we are in duty bound to defer to the law of the state in respect of property within that state. Hervey v. Rhode Island Locomotive Works, 93 U. S. 664, 672, 23 L. Ed. 1003; Dooley v. Pease, 180 U. S. 126, 21 Sup. Ct. 329, 45 L. Ed. 457. The transaction is not changed by the form of the agreement under which it is cloaked. We are to look to the real purpose of the contract, and not to the form or the name given it by the parties. Murch v. Wright, supra; Hervey v. Rhode Island Locomotive Works, supra. We are thus brought to the consideration of the real character and purpose of the transaction between the bankrupt and the storage company. We are to ascertain the real intention of the contracting parties from the whole agreement read in the light of the surrounding circumstances. The bankrupt was largely engaged in purchasing seed upon credit, storing the property purchased in his warehouse. He occupied the premises as a place of business, maintaining an office there, with clerks to assist in the management of the business, and with porters to handle the seed. The premises were subject to a [178] rental of $250 a month. He arranged with' the storage company, which had no warehouse of its own, that it would issue warehouse warrants or receipts to the bankrupt for property upon the bankrupt’s premises for a certain small charge per month upon the value of the property covered by the receipts. He executed a lease of the premises to the storage company, to continue so long as the bankrupt should desire, and so long as property remained thereon for which warrants or receipts had been issued; and this without any payment of rent by the storage company, the rental in fact being paid by the bankrupt. The storage company neither required, nor was it given, any key to the premises. The bankrupt remained in possession of the premises as before the agreement, continuing to transact his business there as he had formerly done. There were certain signs placed upon the different floors of the building, indicating that the storage company controlled the premises. These were small and obscure signs, not likely to attract attention, and most of them hidden behind the piles of bags of seed. No sign was displayed upon the exterior of the building indicating any proprietorship of the storage company, or giving notice to the world that any other than the bankrupt had possession and control. There was no open, notorious manifestation of a change of possession, none was intended, and there was none in fact. Upon each pile of bags of seed for which the warehouse receipts or warrants were issued there was placed a small tag, which might be discovered upon careful search. The bankrupt substantially treated this property as his own, at times going through the forms prescribed by the .storage company, and, whenever he found it necessary, ignoring them. We do not find that the storage company had knowledge of this action of the bankrupt, but it certainly knew that it was possible under the circumstances for the bankrupt to do with the property as he would, since it was left within his control. It is difficult for us to look upon this transaction as a warehousing of property. The storage company assumed no liability to the bankrupt, and assumed only such responsibility as the law imposes upon it with respect to those advancing money upon the faith of its warehouse warrants or receipts. The name of the company is in itself, under the circumstances, a false pretense. It did not store property. It had no premises upon which to store property. The bankrupt stored the property. The bankrupt paid the rental of the premises. It is true that an agent of the storage company occasionally visited the premises and inspected the property in a sort of a way, but exercised no supervision or control that would prevent the bankrupt from doing with it as his will might dictate or his financial necessities might require. We cannot but regard this arrangement as a subterfuge, a mere device to enable the bankrupt to hypothecate the warehouse warrants or receipts, and so to raise money upon secret liens upon property in his possession and under his control. The written agreement indicates this. It is somewhat startling to learn that a warehouse company should store goods of this character for another upon the premises of that other, taking compensation as for storage, not related to the cost of storage, or to the expense of receiving and delivering the property, not according to the space occupied by the property, [179] but according to the value of the property. The fact here is patent, that the storage company assumed to the bankrupt no liability, and that the sole purpose was to issue warehouse warrants or receipts, making such inspection only as, in its judgment, would protect it from liability to third persons by reason of the issue of its warrants. To uphold such a scheme would permit every merchant in the state, notwithstanding the declared policy of the state to the contrary, to have possession of large stocks, thereby inducing credit, and to cover them with secret liens, thereby deceiving creditors. It would, in effect, permit such merchant to pledge his entire stock without change of possession, without record of it, and without notice to the world. Such a scheme is disapproved by the law of the state of Illinois, which in this instance we are bound to uphold, however specious may be the device or however attractive may be the form! by which it is cloaked. Such a scheme within the state of Illinois is constructively fraudulent as to creditors, and voidable by creditors. Nor can we uphold this transaction as a pledge of the property to the bank and to H. W. Rogers & Bro. Actual or symbolical possession of personal property in the pledgee is essential to its pledge. It .is true that when the actual delivery is to a carrier or warehouseman, and bill of lading or warehouse receipt is given therefor, the transfer of the instrument and its delivery to the pledgee is regarded in the law as delivery of possession to the pledgee of the property represented by the instrument; but it is a necessary condition to the existence of such symbolical possession by the pledgee that the property itself be in the possession of some person other than the pledgor. Two different persons cannot be in the actual adverse possession of the same property or premises at the same time, and, as we find the actual possession and actual control of the property in dispute to have been in the bankrupt, the transfer of these warehouse receipts to bona fide holders for value, even without notice of the fact, cannot constitute a valid pledge of the goods, as the storage company had not possession and control of the goods. Union Trust Company v. Trumbull, supra. It is true that it is ruled by the Supreme Court of Illinois, in the case last cited, that such transactions, being not in fact, but only constructively, fraudulent, are upheld against general creditors, and are only voidable by judgment or attaching creditors—as in the case of an unrecorded chattel mortgage. In such case the lien of the unrecorded mortgage, and the title in the case of a conditional sale, and so also these storage warrants or receipts in the hands of a bona fide holder for value, would be sustained, except as against execution or attaching creditors. It is also ruled that an assignee, under the insolvent law of the state, takes as a volunteer, and subject to all liens and equities enforceable against his assignor. Union Trust Company v. Trumbull, 137 Ill. 146, 27 N. E. 24; Hoover, Owens & Rentschler Co. v. Burdette, 153 Ill. 672, 39 N. E. 1107; Schwartze v. Messinger, 167 Ill. 474, 47 N. E. 719. The rule in some other states of the Union with respect to the rights of an assignee under the state insolvent law is different, doubtless arising from the difference in the [180] various insolvent laws. Some of these laws do not prevent suits by creditors; others do. Under some statutes the assignee represents only the assignor, and can assert only the right of the assignor. Under others the assignee represents also the rights of creditors, and can enforce their rights without respect of the right of the assignor. We are therefore brought to the question whether, under the bankruptcy law, the trustee takes solely in the right of the bankrupt, or whether he also represents the rights which creditors have, and the authority to enforce them; whether the petition in bankruptcy is merely the appropriation by the bankrupt of his property to his creditors, or an assertion in behalf of creditors of rights which they had independently of the bankrupt, and which he himself could not assert. Notwithstanding some loose expressions in the decisions upon this subject, we are satisfied, from a careful scrutiny of the act, that the filing of the petition is something more than the dedication by the bankrupt of his property to the payment of his debts; that the trustee is not only invested with the title of the property, but since, after the filing of the petition, the creditors are powerless to pursue and enforce their rights, the trustee is vested with their rights of action with respect to all property of the bankrupt transferred by him or incumbered by him in fraud of his creditors, and may assail, in behalf of the creditors, all such transfers and incumbrances to the same extent that creditors could have done had no petition been filed. The filing of the petition, followed by seizure and by adjudication in bankruptcy, is a seizure of the property by the law for the benefit of creditors, and an appropriation of it to the payment of the debts of the bankrupt. It is a seizure of the property by legal process, equal in rank to and of the same force and effect as by execution or attachment. This has been held by various courts of appeals, in which decisions we fully concur. In re Pekin Plow Company, 50 C. C. A. 257, 112 Fed. 308; In re Garcewich, 53 C. C. A. 510, 115 Fed. 87. It is said by the Supreme Court in Mueller v. Nugent, 184 U. S. 1, 14, 122 Sup. Ct. 275, 46 L. Ed. 405: “It is as true of the present law as it was of that of 1867 that the filing of the petition is a caveat to all the world, and in fact an attachment and injunction.” We have assumed that the bank and H. W. Rogers & Bro. are bona fide holders for value, and without notice, of these warehouse receipts, giving therefor a full consideration. As against the bankrupt they would be entitled to protection, and would be held to have the title to the property; but, the issue of these warrants being constructively fraudulent as to creditors of the bankrupt, their right must be held subject to the claims of the creditors'. These warrants are not commercial paper, and are not protected by the law governing that class of instruments. The decree is reversed, and. the cause remanded, with directions to decree for the trustee.