Opinion
No. 103.
January 13, 1930.
Appeal from the District Court of the United States for the Southern District of New York.
In the matter of Franz Merz, bankrupt. Petition by John F. Degener, Jr., and others, copartners doing business in the City of New York under the firm name of C.A. Auffmordt Co., against Melville Boyd, trustee, for reclamation of certain merchandise, or proceeds thereof. From an order denying the petition and remitting petitioners to their rights as general creditors, petitioners appeal. Affirmed.
Auffmordt Co. had for many years to a great extent financed Merz in his business. Merz was a manufacturer of woolen cloth, having a mill in Philadelphia and a salesroom in New York City. Auffmordt Co. claimed a lien upon the merchandise in New York to cover their advances, and seek to recover the proceeds of this merchandise sold after bankruptcy to the extent necessary to satisfy their alleged lien.
The earliest written contract between the parties, who had for years been in close business relations, seems to have been set forth in letters in May and June, 1919. The letter by Merz to Auffmordt Co., dated June 7, 1919, which was acquiesced in by the letter of Auffmordt to Merz of June 9, 1919, states the arrangement as follows:
"I intend to sell at my own risk merchandise to Norway, Sweden, Denmark, Holland, Finland, Belgium, Brazil, Argentine Republic and other foreign countries on which merchandise you have a lien for the moneys owing to you by me. The National City Bank or Bankers' Trust Co., to collect the accounts resulting from such sales and to turn the money over to me. The accounts resulting from such sales to be assigned to you as soon as the merchandise is shipped, I to receive the money therefor, as your representative and to turn it over to you as soon as received.
"In order that there may be no misunderstanding at any time with regard to the other arrangements between us, I confirm such arrangements which are as follows:
"As security for all moneys owing to you by me, you have the first lien upon all merchandise in my place of business. All amounts resulting from the sale of such merchandise are assigned to you; all bills are rendered by you to customers (except to those in Norway and other foreign countries as mentioned above, which accounts are collected by the National City Bank or the Bankers' Trust Co., as hereinbefore mentioned) and shall contain a statement that the accounts are assigned to you and payable to you only. You assume one-half of the guarantee of all accounts with the exception of —
"(1) Customers as per special memo agreed upon with your credit office.
"(2) All charges to customers in Norway, Sweden, Denmark, etc., as mentioned above.
"For both of these I assume full guarantee, for which I receive one-half of one per cent. return commission.
"The rendition of accounts, interest charges, commissions, etc., will be continued as heretofore.
"The foregoing arrangements to continue until terminated by either of us upon four (4) months' notice."
At the time the foregoing agreement was made, the place of business of Merz was at 257 Fourth avenue, New York, where he occupied the third and fourth floors. The lease was negotiated and the rent was paid by Auffmordt, but the lease ran to Merz. The name of Auffmordt did not appear on the office doors, but on a bulletin board at the entrance of the building was a sign reading: "Third Fourth Floors, C.A. Auffmordt Co. Factors for Franz Merz."
The goods received from Merz's factory were carried by a trucking company to his place of business at Fourth avenue, and were there receipted for by his employees and placed by them in stock. The goods were thus shipped from the factory to New York with invoices entitled "Invoice from Merz Worsted Mills," which, on their face, designated no consignee; but the receipts which accompanied them and were signed by the employees of Franz, where the goods were delivered, named Franz Merz consignee. Auffmordt paid the trucking company. Any goods which did not come from the factory, but were purchased outside, seem generally to have been consigned to him at Fourth avenue. Each invoice was entered upon the stock book of Merz, and a copy was then sent to Auffmordt for entry in their own stockbooks. The keys of the Fourth avenue office were in the hands of Merz's employees, who opened and closed the premises. Auffmordt, however, paid a man named Munz, who was on the fourth floor and described himself as shipping clerk and packer. One Bittong, who had been an employee of Merz until about six weeks before the failure, was taken over and paid by Auffmordt. The duty of Munz was to act as a packer, and the instructions of both Munz and Bittong were to see that goods did not go out of Merz's place of business until Auffmordt had approved the credit of any purchaser.
McAuliffe, who was the office manager of Merz, testified:
"There was no exception to the rule that every invoice for shipment to a customer of Merz from the Fourth Avenue or the New York place of business had to be O.K.'d by Auffmordt, before it could go out. It had to be O.K.'d by Auffmordt. There was no exception to that rule, city deliveries and everything else. Every shipment that went out had to be O.K.'d by Auffmordt, and that was well known in the establishment. And that rule, so far as I know, was obeyed strictly. It was obeyed strictly. * * * When the goods were sent out to customers, somebody — either the carrier, or expressman, or a customer, or the railroad, or somebody — signed a receipt, and that receipt always read, `Received from C.A. Auffmordt Company.' And that was so with city deliveries as well as any others. * * *"
Munz described his duties in connection with the shipment of goods as follows:
"Merz had two men there; they would lay out the goods, there would be a shipping certificate put on, and also a receipt, and that was sent over to me, and I would always wrap it, and put the name and address of the consignee on the bundle and always put a C.A. Auffmordt stamp on. Merz's name did not appear on the wrapper at all. Before I wrapped and shipped these packages I was always instructed. After the bundle was wrapped, it should be always kept and the ticket was sent uptown to C.A. Auffmordt, and then it would come back to me checked, and I had the duty of shipping, and if the ticket never came back to me, the goods always laid there until it did. * * *"
The orders for sales of the goods were obtained by Merz. The bills sent out were in the name of Merz, but a notice on each invoice, except those sent to foreign countries, stated that the bill had been assigned to Auffmordt.
Auffmordt not only paid the rent for the premises occupied by Merz, but also paid the premiums for the insurance policies on the merchandise therein, which were made payable to Merz and Auffmordt as their interest might appear; they also paid the salary of Munz and Bittong, the telephone charges in Merz's office, the cost of wrapping paper, packing cases, twine, and nails used in connection with the shipment of the merchandise to customers, as well as the bills for lighting, window cleaning and the city water charges of Merz's premises. These expenses were not charged to Merz, but paid by Auffmordt out of their commissions.
The creditors did not make their advances with knowledge that Merz had agreed that Auffmordt should have a lien on the merchandise. The only evidence tending to show knowledge is the statement made at a meeting of the creditors of Merz on January 20th, less than a month before a receiver was appointed. Merz on that occasion is said to have informed the creditors that Auffmordt "claimed so much money on the goods." The evidence was lacking in clear proof that the creditors were told that Auffmordt had a lien on the goods; moreover, not only was it not shown that all the creditors of Merz acquired their claims with notice of Auffmordt's rights, but, so far as appears, none of them acquired their claims with such notice. The meeting of January 20, 1927, at which the information was given to the creditors, seems to have occurred after almost all the indebtedness of Merz had arisen.
The testimony of the creditor, Kerle, as to conversations with Auffmordt Co., is not significant. He apparently was insisting that Auffmordt make further advances to Merz in order to reduce the indebtedness of Merz to himself. But the conversations showed no more than a knowledge that Auffmordt was financing Merz, and not that Auffmordt had a lien on the merchandise of the latter.
The merchandise at the premises of Merz was delivered by the receiver in bankruptcy of Merz to Auffmordt for the purpose of sale, without prejudice, however, to the respective claims of the bankrupt estate and Auffmordt therein. It was stipulated that the question as to the validity of the lien claimed by Auffmordt was to be determined in the District Court. Edwards H. Childs was appointed special master in a proceeding instituted by Auffmordt in said court to enforce their lien. The master reported that the actual possession of the merchandise was in Merz, so that the lien claimed by Auffmordt must fail. His report was confirmed by the District Judge in an order dismissing the reclamation petition of Auffmordt. From that order this appeal has been taken.
Spencer, Ordway Wierum, of New York City (Otto C. Wierum, of New York City, of counsel), for appellants.
David W. Kahn, of New York City, for appellee.
Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
Auffmordt Co. contend (a) that they were at all times in possession of the merchandise upon which Merz had agreed to give a lien; (b) that, even if the possession was in Merz, such possession was in the latter as agent for Auffmordt; (c) that the trustee in bankruptcy is not entitled to challenge the validity of the lien; (d) that Auffmordt in any event had obtained an equitable lien.
The real difficulty with the claim that Auffmordt had possession is that they had no power to exclude Merz. They did not hold the lease of the premises where the goods were stored, and they had no key to the premises. The signs on the floors where the merchandise was placed were those of Merz. No one going there to purchase goods would have had reasonable notice that Auffmordt had any interest in the premises. In Ommen v. Talcott, 188 F. 401, 404, we held that there was not ostensible possession sufficient to support a lien, even though the lease was assigned to the factor and the sales were made in his name. We characterized that transaction as "one of the innumerable schemes by which merchants have attempted to create liens on their goods, which shall be unknown to their creditors and shall not affect their credit, but which shall be enforceable if bankruptcy occurs. They are all based on the idea of giving notice enough to satisfy the law and not enough to inform the creditors."
In the later case of Boise v. Talcott, 264 F. 61, 63, we sustained the claim of the factor. But there the lease was assigned to the latter and the rent paid by him, a notice was placed in the office that "no goods are to be shipped from these premises by any one except the representative of James Talcott," written notice that Talcott was acting as banker was given to the customers, and management and conduct of the business was cared for by his representative, who was constantly at the place of businesss. At the entrance to the left was a large sign reading, "James Talcott Factor for Daly Schaefer," and in the office nearest the entrance was a table, where Talcott's representative sat, with a sign on it reading "James Talcott." There was also evidence that the representative had a key, and opened and closed the premises. Moreover, the agreement between the parties provided that Daly Schaefer should consign to Talcott all goods then owned and thereafter purchased by them, and that Talcott should have exclusive supervision and control of all such goods, which should be in the exclusive possession of said Talcott as factor and that all sales should be made by him.
In the case of In re Spanish-American Cork Products Co. (C.C.A.) 2 F.2d 203, 204, a bankrupt, who was a manufacturer of cork products, undertook to pledge certain of its materials in stock to a bank as security for loans. The property was placed in rooms in the bankrupt's plant nominally leased to an employee of the bankrupt, who, and a watchman, alone had keys to the rooms. Under instructions from the bank, the employee placarded the doors with signs: "Keep Out. Property of A.E. Nichol, Agent." Judge Woods, who wrote the opinion for the Circuit Court of Appeals of the Fourth Circuit, said:
"The necessary indication of possession varies, of course, according to the nature and bulk and situation of the property. The rule is the pledgee must either have actual exclusive possession of the property, or if it remains on the pledgor's premises he must so separate and mark it as to give notice of his possession to the public, who might deal with the pledgor on the faith of it. In this case the cork was in the building occupied by the bankrupt, engaged in the cork business. Those who dealt with it had a right to assume in the absence of notice that the stock of cork carried in the building for use in the business was the property of the company which was using it. There was nothing on the outside to put anybody on inquiry. The public dealing with the cork company or interested in it could not be required to search for notice of some other ownership of the stock of cork by making an obtrusive and prying inspection of the inside of the cork company's premises to find and inquire the meaning of the signs of agency of one of the bankrupt's employees. There is no binding nor well-considered case that goes to that length. It is the duty of the pledgee to make such segregation and marks as will indicate his possession to business men of ordinary prudence dealing with the pledgor in the ordinary course of business."
In the case of an unfiled chattel mortgage the possession of the security holder must be to the exclusion of the beneficial owner, or the mortgage will be invalid against creditors. The same thing is true of a pledgee. Siedenbach v. Riley, 111 N.Y. at page 567, 19 N.E. 275; Steele v. Benham, 84 N.Y. 634; Cornelius v. C.C. Pictures, Inc. (C.C.A.) 5 F.2d 157; Wild v. Porter, 59 App. Div. 350, 69 N.Y.S. 839. Possession of Merz as agent for Auffmordt was not enough under the authorities to protect the latter's lien. Dickinson v. Oliver, 195 N.Y. 238, 88 N.E. 44; Cornelius v. C.C. Pictures, Inc. (C.C.A.) 297 F. 444.
Perhaps no case has better stated the rule that the possession of a pledgee must be exclusive, open, and (so far as the nature and situation of the chattels pledged will permit) actual, than In re Spanish-American Cork Products Co., supra. See, also, Security Warehousing Co. v. Hand, 206 U.S. 415, 27 S. Ct. 720, 51 L. Ed. 1117, 11 Ann. Cas. 789; H.K. Porter Co. v. Boyd (C.C.A.) 171 F. 305. It is clear that enough was not done in the present case to inform creditors of Merz that he had pledged all his property to Auffmordt. Their possession was neither exclusive nor open. While they showed willingness to give inquirers truthful information as to their relation to the goods of Merz, nevertheless a situation existed by the acquiescence of the parties, where Merz was in ostensible control of the business and merchandise at 257 Fourth avenue.
Section 45 of the New York Personal Property Law (Consol. Laws, c. 41), permitting notice of liens to be filed, was adopted in order to enable lienors, whose possession was not actual and ostensible, to protect their security by filing. Only two courses were in fact open to Auffmordt: (a) To give constructive notice to creditors by complying with the filing statute; (b) to give actual notice by maintaining a possession of the pledged merchandise that was open and notorious. Neither was adopted, and their lien consequently must fail.
The claim that the trustee in bankruptcy cannot challenge Auffmordt's rights is of no substance. As we hold that under the New York law a transfer of actual, open possession, or the filing of a notice of lien, was necessary as against creditors, the lien is void against the estate under section 67a of the Bankruptcy Act ( 11 USCA § 107(a). Security Warehousing Company v. Hand, 206 U.S. 415, 27 S. Ct. 720, 51 L. Ed. 1117, 11 Ann. Cas. 789; Ommen v. Talcott (C.C.A.) 188 F. 401. And the trustee, who is armed with all the rights of a judgment creditor, may attack such a lien under section 47 of the same act (11 USCA § 75). In re Perpall (C.C.A.) 261 F. 858.
The contention that Auffmordt may reclaim the proceeds of the merchandise, because there was in any event an equitable lien, is contrary to settled legal principles. Casey v. Cavaroc, 96 U.S. 467, 24 L. Ed. 779; Fourth Street National Bank v. Milbourne Mills Co.'s Trustee (C.C.A.) 172 F. 177, 30 L.R.A. (N.S.) 552; In re Perpall (C.C.A.) 261 F. 858.
We should hardly have said as much, in view of the careful report of the master, except for the earnest contention of counsel for the appellant that the relations of the parties were misapprehended. After a careful reading of the testimony and consideration of the authorities, we are convinced that the order of the court below was right, and it is accordingly affirmed.