Gage Lumber Co. v. McEldowney

WARRINGTON, Circuit Judge. [1] The lumber represented by the two sums of money in dispute was admittedly manufactured and placed on sticks—that is, was piled in the yards of the Clairfield Company—prior to the bankruptcy. We agree with the learned trial judge in the conclusion that the title to the lumber did not pass; but we have not been satisfied that this conclusion is determinative of the case. Indeed, we were so strongly impressed with this doubt that we requested counsel for the respective parties to submit briefs, and they have done so, upon the question in substance whether at the time of the bankruptcy the Gage Company had acquired an interest in the lumber in the nature of an equitable lien, which was enforceable against the trustee of the bankrupt, within the principles laid down in Sexton v. Kessler, — 258 — 225 U. S. 90, 32 Sup. Ct. 657, 56 L. Ed. 995, Hurley v. Atchison, Topeka & Santa Fé Ry., 213 U. S. 126, 29 Sup. Ct. 466, 53 L. Ed. 729, and kindred decisions. [2] We are disposed to believe that this question must be answered in the affirmative. It was thrice stated in distinct terms in the contract that the Clairfield Company should, during the three months in which the advances were to be and in fact were made, “put on sticks” quantities of lumber worth at least the sums of such advances respectively “to apply on our contract.” We think the provisions for making advances toward the manufacture of particular lumber and for stacking it “to apply on our contract” disclose an intent to create a loan and security, as well as an ultimate sale, and so as between the parties to place the transaction outside of the ordinary category of unsecured claims. The contention that the lumber was to be inspected, measured and placed on cars at the yards is not important in the view we take of the case. At most, inspection and loading were for the benefit of the Gage Company and might have been waived by it (Van Winkle v. Crowell, 146 U. S. 42, 49, 13 Sup. Ct. 18, 36 L. Ed. 880; Belding-Hall Manufacturing Co. v. Mercer & Ferndon Lumber Co., 175 Fed. 335, 339, 99 C. C. A. 123 [C. C. A. 6th Cir.]); and measurement was simply to ascertain the amount to be charged against the advances (Leonard v. Davis, 66 U. S. [1 Black] 476, 483, 17 L. Ed. 222). We do not understand that there is any substantial dispute touching the means of identifying this lumber as it stood in piles in the yards. It was distinctive in kinds and dimensions, and the witnesses seem to be in harmony as to the fact that it was manufactured for the fulfillment of this contract. The general manager of the Clairfield Company forwarded monthly lists showing the lumber “put on sticks to apply on this contract.” No other lumber like this appears to have been in the yards. This was made plain when an accredited representative of the Gage Company visited the yards in June, July, and September, 1907 (prior to the bankruptcy), and easily identified the lumber, examined it; and gave repeated orders to have it shipped, even stating in respect of the lumber, as testified to by the general manager of the Clairfield Company : ’“Skip it green, and it will be our loss if it stains in the ear, as the lumber had only been on sticks a short time.” Concededly the required inspection and loading on cars were not waived, but the identity of the lumber and its fitness to apply on the contract were complete. What, then, were the rights of the parties to the contract ? Plainly the Gage Company advanced its money and was to be repaid in lumber of specified kinds, dimensions, and qualities. At the date of the contract the lumber had not been manufactured; but the contract required its manufacture, and its distinctive character identified it with its purchasers. The provision of the contract obligating the Gage Company only “to pay half cash on each invoice as rendered, the balance to apply on the payment of the notes given,” cannot affect the present question. Upon the theory that title to the lumber passed to the Gage Company—that is, on the current deliveries it was simply receiving its own — 259 — property—there was no occasion to pay anything, and each of these 50 per cent, payments was a new advance; but, treating the contract as one of equitable lien, this complication disappears, and the original advances, so far as unpaid, always remained a lien on all the undelivered lumber manufactured thereunder. The advances accumulated, as we understand the fact, through the failure of the Clairfield Company to manufacture and ship the lumber as fast as the advances were made. A court of bankruptcy views transactions of this kind upon the broadest equitable principles, and does not hesitate to effectuate the actual intent of transactions honestly had with a bankrupt, without much restraint as to formality or procedure. Hurley v. Atchison, Topeka & Santa Fé Ry., supra, 213 U. S. at page 132, 29 Sup. Ct. 466, 53 L. Ed. 729, approving language of Circuit Judge Putnam. When we regard the substance and effect of the present transactions, apart from their form, it is reasonably plain that the Clairfield Company would not be heard to say that the Gage Company did not, through its advances and the other company’s actual production and stacking of the lumber, acquire an interest, certainly an equitable interest, in 'this lumber. The essence of the purchaser’s right was the fact, constantly to be remembered, that each advance was made for the very, purpose of having a particular thing produced. The last analysis of such a transaction is that, when the lumber was produced and placed on sticks, it was in effect appropriated toward the payment of the loan as required and promised under the contract. It is true that, in the negotiations leading up to the contract, efforts were made, which failed, to have the lumber as it was piled marked with the name of the Gage Company, also to have a lease made to that company of part of the yard upon which to set aside the lumber as it was manufactured; the representatives of the Clairfield Company expressing, as to the one plan, fears that it would injure the credit of the company, and, further, that they did not wish Mrs. Anderson, the president of the company, to know of the advances, and declaring in respect of the latter plan that the company held the property under lease and had no right to sublease. But (aside from any question of admissibility of such statements) these features of the negotiations concerned an endeavor of the Cage Company to secure a transfer to it of the title to the lumber as fast as it was produced; and while it must be conceded that in one sense such statements would seem to be opposed to a purpose to create an equitable lien, yet no charges of fraud or bad faith are made respecting either the negotiations or the contract, and, since the contract was admittedly entered into in the form pointed out, it must be construed. To say, then, that such antecedent negotiations are inconsistent with the idea of an equitable interest in the lumber, is to urge that the repeated use of the words “to put on sticks to apply on our contract” is meaningless; in a word, it is to destroy the most significant portions of the contract. And as to the effect upon creditors of an equitable lieu, as distinguished from a formal and published lien, this contention at last aifiounts to a challenge of the soundness of the doctrine of York Manufacturing Co. v. Cassell, 201 U. S. 344, 26 Sup. Ct. 481, 50 L. Ed. 782, and of all the decisions affirming — 260 — and settling its principles. To illustrate, as respects creditors failing to fasten a lien on the bankrupt’s property, that doctrine enforces instruments which have not been published by filing or recording as required by law. The nature of an equitable charge or lien, and the principles upon which the courts proceed in fastening such charges upon the objects intended as security, are so familiar that we are content to cite only a few of the leading decisions. In Hurley v. Atchison, Topeka & Santa Fé Ry., supra, a mining company had contracted to mine and deliver coal sufficient to meet the current needs of the railroad company, but through financial embarrassment was unable to do so; and in order to assist the mining company to keep its agreement, the railroad company furnished the mining company with money in advance of the agreed time of payment, and it was held that this implied (213 U. S. 134, 29 Sup. Ct. 466, 53 L. Ed. 729)— “a purpose that the coal as mined should be delivered, and is from an equitable standpoint to be considered as a pledge of the unmined coal to the extent of the advancement.” This was not because of the intervention of bankruptcy or of the trustee’s continued performance of the parol agreement previously made between the mining company and the railroad company, as counsel for the Clairfield Company urge. It was in consequence and in recognition of the previous parol agreement. Justice Brewer there distinctly approved language of the Court of Appeals, which is pertinent here: “The money paid in advance entitled the railway company to an amount of coal which the money so advanced would pay for according to the terms of the original contract. We think the inevitable meaning of the new arrangement, interpreted in the light of the conditions surrounding the parties and as necessarily intended by them, was to pledge (set apart) a sufficient amount of coal after it should be mined as security for the payment of advances made. This result is not expressed in the conventional form of a mortgage or pledge, but the method of producing it was devised for the purpose of acquiring the needed money by the coal company and of furnishing security for its repayment. If the parties intended the arrangement to be one for borrowing and securing the repayment of money, we ought, as between them, to so regard it, and to treat it as creating an equitable charge or lien, however inartificially it may have been expressed.” See Walker v. Brown, 165 U. S. 654, 664, 17 Sup. Ct. 453, 41 L. Ed. 865; Ingersoll v. Coram, 211 U. S. 336, 368, 29 Sup. Ct. 92, 53 L. Ed. 208; Fourth Street Bank v. Yardley, 165 U. S. 634, 644, 17 Sup. Ct. 439, 41 L. Ed. 855; Ketchum v. St. Louis, 101 U. S. 306, 316, 25 L. Ed. 999; Barnard v. Norwich & Worcester Railroad Co., 4 Cliff. 351, 365, Fed. Cas. No. 1,007 (per Justice Clifford). See, also, Howard v. Delgado & Co., 121 Fed. 26, 57 C. C. A. 270 (C. C. A. 5th Cir.), and citations. We do not see that these decisions are met by those relied on by ap- ° pellee’s counsel. It is enough to say that we do not regard his citations as relevant. Nor do we think the proceeding in the Claiborne chancery court operated to vest in the general creditors of the Clairfield Company any better right than that company itself had against the Gage Company; — 261 — for, while the petition in bankruptcy is not ’ included in the record, Judge Cochran said in his opinion below (194 Fed. 182): “On the same day that the petition in bankruptcy was filed, insolvency proceedings against the bankrupt were begun in the proper slate court oC Tennessee* and one J. H. Bartlett was appointed receiver therein. September 9th he took possession of the assets of the bankrupt, including all its lumber stacked in its yard at Clairfield. * ~ * Upon the appointment of AleEldowney as trustee In bankruptcy, the receiver surrendered possession of the lumber taken possession of by him, including that claimed by the Gage Company in its action of replevin, and the other assets of the bankrupt to him, and by consent the assertion of its claim thereto was transferred to this court.” [3] As regards the time of the commencement of the proceeding in the state court and of the bankruptcy proceeding, counsel for the Clair-field Company agrees with Judge Cochran, although counsel for the Gage Company says that the bankruptcy proceeding was begun two days later. We think we should accept the statement of the court. It is settled (Acme Harvester Co. v. Beekman Lum. Co., 222 U. S. 300, 307, 32 Sup. Ct. 96, 99 [56 L. Ed. 208]) that: “The filing of the petition pin bankruptcy! is an assertion of jurisdiction with a view to the determination of the slatus of the bankrupt and a settlement and distribution of his estate. The exclusive jurisdiction of the bankruptcy court is so far in rem that the estate is regarded as in custodia legis from the filing of the petition.” Moreover, the transfer of the controversy between the two lumber companies to the bankruptcy court seems to have been for the purpose of testing the rights of those companies as they stood before either of the proceedings mentioned were commenced. These facts distinguish the present case from that of Cincinnati Equipment Co. v. Degnan, 184 Fed. 834, 107 C. C. A. 158 (C. C. A. 6th Cir.). [4] It scarcely need be said any more that a trustee in bankruptcy, before the amendment of 1910, stood no better than the bankrupt. The same rule prevails in Tennessee as respects the rights of an assignee for the benefit of creditors (Stainback v. Junk Bros., 98 Tenn. 307, 319, 39 S. W. 530); also of a receiver as to prior equities (Johnson v. Tucker, 2 Tenn. Ch. 398, 401). It follows that the rule of York Manufacturing Co. v. Cassell, supra, which originated in Ohio, is applicable here; so of In re Huxoll, 193 Fed. 851, 856, 113 C. C. A. 637 (C. C. A. 6th Cir.), which arose in Michigan; so, also, of Toof v. City Nat. Bank of Paducah, 206 Fed. 250, coming here from Kentucky, decided June 3,1913. And as Justice Brewer said in Hurley v. Atchison, Topeka & Santa Fé Ry., supra, 213 U. S. 134, 29 Sup. Ct. 469, 53 L. Ed. 729: “The equitable rights of the parties were not changed by the commencement of bankruptcy proceedings. All obligations of a legal and equitable nature remained undisturbed thereby. If there had been no bankruptcy proceedings, the coal as mined was, according to the understanding of the parties, to be delivered as already paid for by the advancement.” [5] As to the claim and the holding below that the seven car loads represented by the second sum of money in dispute amounted to a preference within the meaning of section 60 of the Bankruptcy Act of July — 262 — 1, 1898, c. 541, 30 Stat. 562 (U. S. Comp. St. 1901, p. 3445), it is to be said that, although this portion of the lumber was shipped as late as September 9, 1907, the rights of the Gage Company had their origin in the contract of September 6, 1906, and, so far as we can discover, became effective as early as those respecting the other lumber; and it is to be borne in mind that no issue of bad faith is involved. The theory of the decisions, before cited, is that the trustee receives the property of the bankrupt subject to the liens equitably chargeable against it, and, as respects their enforcement, stands in the shoes of the bankrupt. Furthermore, besides its general application to the instant case, the decision in Sexton v. Kessler, supra, we think, rules this case so far as the alleged preference is concerned. See, also, Belding-Hall Manufacturing Co. v. Mercer & Ferndon Lumber Co., 175 Fed. 335, 339, 99 C. C. A. 123 (C. C. A. 6th Cir.); Union Trust Co. v. Bulkeley, 150 Fed. 510, 516, 517, 80 C. C. A. 328 (C. C. A. 6th Cir.); 1 Loveland on Bankruptcy (4th Ed.) § 478. The decision below must be reversed, with costs, and the case remanded for further proceedings in accordance with this opinion.