Security Warehousing Co. v. Hand

143 F. 32, 74 C.C.A. 186, 1906 U.S. App. LEXIS 3704

• Court: Court of Appeals for the Seventh Circuit
• Decided: January 2, 1906
• Docket: No. 1,090
• Status: Published

Opinion

BAKER, Circuit Judge,

after stating the facts as above, delivered the opinion of the court:

1. The motion to dismiss the appeal is based on the contention that the record presents a “proceeding in bankruptcy” and not a “controversy arising in the course of bankruptcy proceedings.” The distinction was recently considered by this court in the case of In re Friend, 134 Fed. 778, 67 C. C. A. 500. The pleadings filed by the appellants in the District Court were in substance bills in equity to establish and enforce their liens and right of possession, and to enjoin the appellees from beclouding their rights and disturbing their possession. The District Court, on the initiative of the appellants, had. complete jurisdiction to determine these questions in a plenary suit, which was an independent controversy between adverse claimants and the trustees, and was not a part of the proceedings in the administration of the estate. Dodge v. Norlin, 133 Fed. 363, 66 C. C. A. 425; Liddon v. Smith, 135 Fed. 43, 67 C. C. A. 517; Marshall v. Knox, 16 WalL. 551, 21 L. Ed. 481; Stickney v. Wilt, 23 Walk 150, 23 l. Ed. 50; Hewit v. Berlin Machine Works, 194 U. S. 296, 24 Sup. Ct. 690, 48 l. Ed. 986. The claim of appellees that the authority of the cases above cited is impaired by the decision in First Nat. Bank v. Title & Trust Co., 198 U. S. 280, 25 Sup. Ct. 693, 49 L. Ed. 1051, is entirely unwarranted. In that case the receiver filed a petition asking the court’s directions in respect to a sale of certain property. In the petition the receiver recited that he had taken possession of the property. The adverse claimants appeared specially and objected to the jurisdiction of the District'Court to decide the controversy respecting their right of possession. Inasmuch as the adverse claimants were entitled to have their rights determined in a plenary suit, the District Court was without authority to proceed against them summarily, and the District Court could not entertain a plenary suit brought by the trustee, “unless by consent of the proposed defendant.” Section 23b Bankr. Act July 1, 1898, c. 541, 30 Stat. 552 [U. S. Comp. St. 1901, p. 3431]. The fact that the adverse claimants were entitled to a plenary hearing in a proper tribunal did not touch the other fact that the receiver’s petition to the court for instructions respecting a sale of the property was a proceeding in bankruptcy. As the present record discloses a “controversy arising in the course of bankruptcy proceedings”, the appeal was properly taken under section 24a (30 Stat. 553 [U. S. Comp. St. 1901, p. 3431]); and the motion to dismiss is accordingly overruled.

2. Error is predicated on the overruling of appellants’ fourth and sixth exceptions to the referee’s report. The fourth asserts that the referee erroneously failed to find “that all the doors to the Security Warehousing Company’s inclosures at Racine were kept locked, and the keys thereof were always in the custody of the custodian Amend or of the subcustodian Netzinger;” and the sixth “that the two doors at the elevator opening on the second floor [at Racine] were always kept locked, and the keys thereof were continuously in the custody of the custodian [Amend] or subcustodian'[Netzinger].” These exceptions assume that the evidence required a finding that the inclosures at Racine were the security company’s; that is, that, regardless of the paper forms employed by the knitting company and the security company, the possession and use of the inclosures were in fact unequivocally and exclusively in the security company; and that the doors thereto were not opened by Amend or Netzinger except as agents of, and for the purposes of, the security company. The evidence shows that the inclosures in the railroad roundhouse were built by the knitting company; that the lease from the knitting company to the security company included the entire first and second floors, though the inclosures did not; that the knitting company, after the lease, continued to use, for its own storage purposes, the space outside of the inclosures, as it had before; that the goods (hosiery and underwear) were easily movable from place to place; that goods not “manifested” were put in and taken put*of the inclosures by employés of the knitting company; that Amend was assistant general manager of the knitting company, and Netzinger was shipping clerk at Racine; that Amend was absent from Racine a large part of the time, and left the keys with Netzinger; that the security company did not appoint, and Amend had no authority to appoint, Netzinger subcustodian; and that Netzinger as shipping clerk filled orders from cases without or within the inclosures as need required. These, and other facts regarding visible tokens of a change of possession, which will be considered later, satisfy us that the referee’s finding was as favorable to appellants as the evidence justified.

3. Were the receipts of the security company entitled to the status of negotiable instruments the transfer of which operates as delivery?

Their validity as proper warehouse receipts is to be determined by the laws of Wisconsin. Hallgarten v. Oldham, 135 Mass. 1, 46 Am. Rep. 433; In re St. Paul & Kansas City Grain Co. (Minn.) 94 N. W. 218.

Chapter 340, p. 346, Raws 1860 (amended by chapter 73, p. 96, Raws 1863), conferred negotiability upon “warehouse receipts, * * * given for goods * * * deposited with any warehouseman, wharfinger, vessel, boat or railroad company, or other person.” That the “other person” must be ejusdem generis and must assume an obligation to the public like an innkeeper, or a common carrier, and that the place of business of every one within the class must be openly held forth as such, is shown in Shepardson v. Cary, 29 Wis. 34:

“To uphold the receipt as a proper warehouse document, transferring the title to the property and operating as a good constructive delivery of it to the vendee, it must in all cases distinctly appear, that it was executed by a warehouseman, one openly engaged in that business, and in the usual course of trade.”

In Geilfuss v. Corrigan, 95 Wis. 651, 70 N. W. 306, 37 L. R. A. 166, 60 Am. St. Rep. 143, decided in 1897, a furnace company issued formal warehouse receipts upon its own iron, stored in its own yards, to a mining company which used them as collateral. The court said:

“The so-called storage warrants were not warehouse receipts. * * * In order to be such they must be issued by a warehouseman or one openly engaged in the business of storing property for others for a compensation. * * * Not only was there no proof in this case that the furnace company was in the warehousing or storage business, but, on the contrary, the proof was conclusive that it was not in such business, and never had been. The fact that it surreptitiously issued the false receipts in question did not constitute it a warehousing corporation. As well might it be argued that the issuance of counterfeit bills constitutes the counterfeiter a bank.”

That was a case of a manufacturer’s issuance of documents in the form of warehouse receipts for his own goods, stored on his own premises. Should owners of public warehouses in Wisconsin be permitted to issue negotiable receipts for their own goods, stored in their own warehouses? Should any other persons, not owners of public warehouses, issue negotiable warrants for their own property, in their own possession? These questions were answered by the Legislature in 1899. The act concerning warehouse receipts was amended by adding:

“And any warehouse receipt issued by any person or persons keeping, running and managing a public warehouse, on goods, wares, or merchandise owned by him or them, and which he or they have at the time of issuing such warehouse receipt actually stored in the said warehouse, shall have the same force and effect to protect the owner and holder thereof on any loan or advance of money he may have made on the same, as a warehouse receipt issued by the keeper and manager of a public warehouse to any other person who brings goods, wares, or merchandise to be stored in such public warehouse.”

It was also enacted that any person owning grain, or certain other named commodities, who owned or controlled the structure in. which his grain was stored, might issue negotiable receipts, provided he first should file in the office of the register of deeds of the county a written statement of his intention and an accurate description of the structure and its location, and should keep an open registration of all receipts issued, and should certify on his receipts that the act had been fully complied with.

These statutes and. decisions prove to us that in Wisconsin one who is not an owner of a “public warehouse” or a grainowner that has complied with the last recited statute, can obtain a negotiable warehouse receipt for his own goods in no other way than by taking them to a “public warehouse;” that is, a place that is held out to the public as being one where any member of the public, who is willing to pay the regular charges, may store his goods and then sell or pledge them by transferring the receipt given him by the keeper or manager.

In the present case the main office of the security company was in New York; the nearest district office was in Chicago; from there the receipts were issued; and in Wisconsin the security company had no office and no warehouses, unless the inclosures within the buildings of the knitting company at Racine and Stevens Point be counted such. The receipts themselves would put the holders thereof on notice of these facts. And at Racine and Stevens Point the security company gave no evidences to the public of its presence. No signs were displayed to the passerby. No business was sought from the public. The only property within the inclosures was the knitting company’s. The knitting company did not want storage room, but collaterals, which the security company agreed to furnish for a commission upon the amount thereof plus all expenses. The security company’s only agents on the scene were the agents of the knitting company who cared for and shipped out its goods. That this was the only business contemplated is disclosed by the agreement that the knitting company should be restored to full possession of the premises at any time it returned the outstanding receipts. This, in our judgment, was not warehousing within the law of Wisconsin.

In Union Trust Co. v. Wilson, 198 U. S. 530, 25 Sup. Ct. 766, 49 L. Ed. 1154, it is said:

“Although the first question does not refer in terms to the statutes of Illinois, it is proper to add that we see no sufficient reason for denying to the place of storage the character of a public warehouse. ‘Public warehouses of Glass C shall embrace all other warehouses or places where property of any kind is stored for a consideration.’ Hurd’s Rev. St. 1903, § 135, c. 114 (§ 2). These sweeping words embrace any place so used, whether owned or hired by the warehousemen, and, if so, they embrace as well a place hired of the owner of the goods as one hired of anybody else.”

We find no provision in Wisconsin that warrants the disregard of the elements of the publicity that attaches to an openly conducted business, and the obligation to serve the public at large.

4. Though the receipts be ineffective as .proper warehouse receipts, the security company may have had such a possession that the transactions may be upheld as pledges by the knitting company to the appellant lenders, the security company standing as the agent of the lenders for the purposes of possession.

Wisconsin, in addition to the usual requirements of an actual and continued change of possession of chattels sold or covered by an unrecorded mortgage, has enacted that conditional sales shall be recorded. This unmistakable policy in regard to secret liens on personalty should forbid any laxity in the construction or application of the law of pledges. Seymour v. Colburn, 43 Wis. 67.

Delivery of possession is the very life of a pledge. No mere agreements respecting possession can create it. The contract of pledge cannot exist outside of the fact of change of possession. The pledgor must dispossess himself openly, completely, unequivocally, and “without deceptive combinations which lead third persons into error as to the real possessor of the thing.” And the pledgee must take and maintain an open, exclusive and unequivocal possession. Dirigo Tool Co. v. Woodruff, 41 N. J. Eq. 336, 7 Atl. 125; Drury v. Moors, 171 Mass. 252, 50 N. E. 618; Bank v. Jagode, 186 Pa. 556, 40 Atl. 1018, 65 Am. St. Rep. 876; Casey v. Cavaroc, 96 U. S. 467, 24 L. Ed. 779.

At Stevens Point the inclosure was in the knitting company’s own warehouse, which was openly occupied and used by it after the lease as well as before. No signs on the building dr on the door leading into it announced the presence of the security company. The inclosure in one corner of the building was of slats, between which the packages of goods inside could be seen. No signs regarding the security company’s possession were placed on the outside of the inclosure in ‘ 1901 nor at any time until in September, 1903, very shortly before the bankruptcy proceedings were begun, when the district manager of the security company came from Chicago, and changed a sign from inside, over the door, to outside, on the door. The signs inside were ambiguous, in that they referred to bins and chutes, and much of the time were not to be seen on account of the piled-up goods. _ The security company’s agent, on. the ground to maintain an open, unequivocal and exclusive possession, was the cashier of the knitting company, who had charge of the stock and of shipping. The key to the inclosure was kept on a ring with other keys used in the business of the knitting company; and this bunch •of keys was accessible to the manager of the knitting company, and was left at the office during the cashier’s absences. Substantially the same conditions obtained at Racine.

If a creditor desired to look over the property of the knitting •company, what would be the probable result? The cashier or shipping clerk or manager could take the bunch of keys, unlock the warehouse, show the raw materials, and broken stock outside of the slatted inclosure, point out the quantity of goods within the inclosure, •explain the necessity of the inclosure to prevent pilfering of the hosiery, etc., when the warehouse was open; and nothing would warn the creditor of the deception. And the evidence satisfies us that at least one creditor was so deceived.

So far from the security company’s maintaining an open, exclusive, unequivocal possession during the two years this arrangement was •carried on, it seems to us that the security company might as well have been eliminated, and the knitting company have employed its own stockkeepers and shipping clerks as custodians for intending, lenders, directly, instead of indirectly through the security company. In that view this becomes one of the cases “in which the exclusive power of the so-called bailee” (Union Trust Co. v. Wilson, 198 U. S. 530, 537, 25 Sup. Ct. 766, 768, 49 L. Ed. 1154) tapers away to nothingness. Drury v. Moors, 171 Mass. 252, 50 N. E. 618; Bank v. Jagode, 186 Pa. 556, 40 Atl. 1018, 65 Am. St. Rep. 876.

5. The appellant lenders finally assert that, if they have neither the negotiable receipts of a public warehouseman nor a pledge through an unequivocal possession by their agent, the security company, nevertheless they have “equitable liens” which entitle them to the possession of the property as against the trustees.

The trustee succeeds, as of the date of the adjudication, not only to the bankrupt’s title and possessory right to the property, but also to the right of the bankrupt’s creditors to assert that the title and possessory right, as to them, is in the bankrupt. Section 70'a (4) and (5) ; section 70e (30 Stat. 565, 566' [U. S. Comp. St. 1901, pp. 3451, 3452]). Liens that remain undisturbed are those that were good against both the bankrupt and his creditors immediately preneeding the adjudication. Hewit v. Berlin Machine Works, 194 U. S. 296, 24 Sup. Ct. 690, 48 L. Ed. 986; Thompson v. Fairbanks, 196 U. S. 516, 25 Sup. Ct. 306, 49 L. Ed. 577; Chesapeake Shoe Co. v. Seldner, 122 Fed. 593, 58 C. C. A. 261. The conclusion results not merely from a consideration of the nature of the trustee’s-succession, but as well from the inhibitions of the act. Section 67a (30 Stat. 564 [U. S. Comp. St. 1901, p. 3449] vitiates as liens all “claims which" for want of record or for other reasons” the bankrupt’s creditors might have avoided as liens; that is, no secret liens or equities shall prevail against the trustee that were not good against the general unsecured creditors represented by the trustee. Section 67d protects “liens given or accepted in good faith * * * and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice.” The liens thus saved are liens, not promises to give liens, not equitable claims that what ought to have been done shall be considered done, but liens perfected according to law. “Notice” as well as “a present consideration” is necessary. If a chattel mortgage be given in good faith and for a present consideration, recording is not obligatory, but the imparting of notice is. Recording is one way, another is actual and continued change of possession. If a pledge be similarly given, recording is not “necessary in order to impart notice,” because no provision has been made that a record of the fact shall be notice of the fact; but what is “necessary in order to impart notice” is the delivery of exclusive and unequivocal possession. We think that Section 67d does not change Section 67a into the meaning that “claims which for want of record or for other reasons” are not good liens as against creditors are good liens as against the estate if the lender advanced his money without any actual intent to defraud unsecured creditors. He is chargeable with the constructive intent which is attributed to secrecy.

The decree is affirmed.